Risk-On Risk-Off is a state of financial markets in which many market participants are either risk averse and sell off risky assets such as equities to finance investment in safe assets such as bonds (“Risk Off”), or less risk-averse and willing to invest in risky assets such as equities by selling off safe assets such as bonds. In this study, we look at the Risk-On Risk-Off effect in international stock and bond markets for the period April 2002 to April 2013.
We find that the Risk-On Risk-Off effect in international stock and bond markets significantly affects the Australian stock market. When Risk-On Risk-Off is not present in international stock and bond markets the Australian stock market generates an average return of 14.8%pa compared to an average return of 0.5%pa when Risk-On Risk-Off is present. Moreover the average return in Risk-On periods is 86.9%pa while the average return in Risk-Off periods is -89.8% reflecting the huge volatility that the Risk-On Risk-Off effect causes in the Australian stock market.
This paper was presented in July 2013 at the 18th Melbourne Money and Finance Conference (MMFC), which explored the theme Financial Sector Evolution – Prospect and Determinants.
For more papers presented in the conference, please click here.