RORO stands for “risk On, risk closed”.
RORO describes a market environment in which price action responds to and is driven by changes in the risk tolerance of investors and traders.
Changes in risk tolerance are often due to sudden shifts in the global economic outlook.
Traditionally, financial assets have been evaluated independently of each other based on their unique characteristics. Therefore, in most cases, the transfer of assets is independent of each other.
RoRo era, times have changed.
Financial assets are now simply divided into two camps:
- Low risk
- High risk
When optimism is high. Market participants “flip on” the risk switch and move toward riskier asset classes.
This means that during periods when risk is perceived to be lower, traders tend to purchase higher risky assets (“Risk”) Open”).
When risk is perceived to be higher, traders tend to sell higher-risk assets and buy lower riskinvestments (“risk”).
So if optimism turns to pessimism, market participants will flip the switch to the “off” position.
And, as a group, they retreated into safe-haven asset classes.
This means that assets tend to become correlated with each other, either positively or negatively, rather than moving independently of each other.
“Risk Averse” Assets vs. “Risk Averse” Assets
Here is a cheat sheet for buying or avoiding assets in a “risk-on” and “risk-off” environment.
- Stock
- Commodity currencies (AUD, CAD, NZD)
- Emerging Market Currencies
- Energy Commodities
- BOND
- USD
- Yen
- Swiss Franc
- Non-commodity currency
- High Quality Bonds (U.S. Treasury Bonds)
- US Dollars
- Yen
- Swiss Franc
- Stock
- Item
- Non-Commodity Currencies (AUD, CAD, NZD) Emerging Market Currencies
“Ro-Ro trade”
The theory behind roll-on-roll-off is the tug-of-war between inflationary and deflationary forces.
- When inflationary forces are thought to be on the rise, then “Risk ”.
- When deflationary forces are thought to be strengthening, then “risk is off”.
The influence of “risk risk , risk is closed” is greater volatility, most importantly, assets are more correlated .
Since the 2008 financial crisis, there has been a growing trend among market participants, especially institutional investors/traders, to buy risk (“risk on”) ) When inflation is the main expectation for the economy, and when deflation is the main expectation for the economy, sell Risk (“Risk”).
Because all of these market participants engage in similar types of transactions, they are sometimes referred to as “RoRo trades.”
The massive movement by large financial institutions, hedge funds and traders to go “all in” or “all out” across asset classes has resulted in many assets becoming highly correlated .
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