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    Risk-on/Risk-off: Financial market response to investor fear

    239261_239261.pdf (990.4Kb)
    Access Status
    Open access
    Authors
    Smales, Lee
    Date
    2016
    Type
    Journal Article
    
    Metadata
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    Citation
    Smales, L. 2016. Risk-on/Risk-off: Financial market response to investor fear. Finance Research Letters. 17 : pp. 125-134.
    Source Title
    Finance Research Letters
    DOI
    10.1016/j.frl.2016.03.010
    ISSN
    1544-6123
    School
    Department of Finance and Banking
    URI
    http://hdl.handle.net/20.500.11937/22517
    Collection
    • Curtin Research Publications
    Abstract

    This paper examines the relationship between changes in the level of investor fear (measured by VIX) and financial market returns. We document a statistically significant relationship, across asset classes, consistent with a flight to quality as investor fear increases. As VIX increase there is a decline in stock markets, bond yields, and high-yielding currencies (AUD and NZD), while the USD appreciates. Returns become more sensitive to changes in the level of investor fear during the financial crisis of 2008-09, when investor fear spikes sharply. Analysis of market returns subsequent to periods of extreme levels of investor fear suggests some predictive ability for future returns, and it is suggested that this may be used to develop a profitable trading strategy. Taken together, the results confirm that financial market returns are closely related to prevailing levels of investor fear.

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