Risk on risk off
Family IX · Macro
Not to be confused with forex risk.
Risk on risk off describes a market state in which correlations across asset classes rise because a single factor — appetite for or aversion to risk — dominates pricing. In a risk-on phase, capital tends to flow toward equities, high-yield credit and commodity currencies; in a risk-off phase, it tends to flow toward government bonds, the US dollar, the yen and gold. The framework is a description of prevailing correlation structure, not a fixed rule, and its strength varies over time and across jurisdictions.
Mechanics
Under a risk-on risk-off regime, otherwise unrelated assets begin to trade as expressions of one view. The mechanism is a common discount factor: when investors collectively raise or lower the price of uncertainty, expected returns on all risky assets shift together. This produces elevated positive correlation among risk assets and elevated negative correlation between risk assets and havens.
Regime shifts are often identified by watching a small set of proxies: equity indices, credit spreads, implied volatility measures such as the VIX, and the exchange rates of funding and haven currencies. No single indicator defines the regime; the signal is the co-movement itself.
Worked example
A simplified illustration of how a risk-off shock can move a multi-asset book. Figures are hypothetical and for exposition only.
Limits and variation
The framework is not always active. In some periods, asset-specific factors — earnings, policy rates, commodity supply — dominate, and cross-asset correlations fall. The strength and even the sign of risk-on risk-off behaviour varies by currency pair, by sector and by market regime.
Which assets are treated as havens also varies by country and by era. The Swiss franc, the Japanese yen and the US dollar have each served as funding or haven currencies at different times, and their behaviour during stress depends on the location of the shock and on prevailing interest-rate differentials.
Often confused with
- forex risk
- Risk on risk off is a cross-asset regime framework, whereas forex risk is the exposure of a currency position to adverse exchange-rate movements; the visible sign is that risk on risk off is measured by correlation across asset classes, while forex risk is measured as a profit-and-loss sensitivity to a single pair.