Risk appetite

A description of collective behaviour rather than a quantity anyone reports. Nobody publishes a figure for how much uncertainty markets are prepared to carry, so the reading is taken from relative prices: how credit is priced against government debt, how equities move against bonds, what an index of implied volatility is doing, and which currencies are being bought against which. When those measures move together, the shorthand for the regime is risk-on risk-off.

What moves it is a mix of policy, growth expectations, funding conditions and events nobody scheduled. It does not move smoothly: appetite tends to erode gradually and to disappear abruptly, an asymmetry observed often enough that risk models built on symmetric assumptions are routinely criticised for it. Positions built to earn a differential, such as a carry trade, are the standard illustration, since they have historically been unwound together and quickly when appetite has fallen.

Two cautions apply. Indices published under names like risk appetite or fear are constructions, and their inputs differ by provider, so two of them can disagree about the same day without either being wrong. And the classifications the concept depends on are market habits rather than properties: which currencies are treated as defensive has changed over time, and a relationship that held for years can be overwhelmed by an interest rate differential moving the other way. Practitioners disagree about how much of the framework survives once rate differentials are large.