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Stress Testing Report: Risk on/Risk off in a Multifactor World

Please join MSCI for a webinar where we will examine how factors in the BIM301 model structure behave under Risk-on/Risk-off conditions. We describe typical factor movements under a Risk-off scenario and specify a stress test which models factor changes when risk aversion is high. Additionally, we provide insights to factor movements in the Risk-on scenario.

Risk-on/Risk-off has become a common term used to describe market behavior. In the Risk-on scenario, investors display a greater risk appetite to buy “risky” assets. As a result, equity prices tend to increase. Alternatively, during periods of Risk-off behavior, risk aversion increases and flight-to-quality flows push equity prices lower while “safe haven” assets outperform. In this binary world, asset prices move in tandem and have high correlations, presenting additional challenges to investors.

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