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An Extended Risk Appetite Index

Daniel Goldman profile picture
Daniel Goldman


  • I have already written a few articles on how the yen can be used as a measure of risk appetite.
  • The yen is a useful measure, however, it is not the only measure. Gold is also a safe haven, and can be used as well.
  • A norm combining an approximation for risk appetite expressed by the yen, and the risk appetite expressed by gold can be produced to get a clearer picture of overall appetite.

I have written a few articles on risk at this point. The first was on the difference between the Japanese yen and VIX as measures of risk (The Yen Vs. The VIX: 2 Aspects Of Attitude Towards Risk), with the former security more closely related to risk appetite, and the latter more closely related with expectation of risk. I then expanded on this idea by simply taking the change in USD/JPY and dividing it by the change in DXY, thus taking into account changes in the overall exchange rate of the dollar, as a possible reason for fluctuations in the yen (A Simple Risk Appetite Index).

However, this index is, as the name suggests, a simple one. It is partially impacted by the Japanese economy itself. There is, however, a way to limit how much that impact will have on the index, and that is to average it with another measure of risk appetite. For that, we can use gold. Or, if the data for gold is not immediately available, use GLD or gold futures, which closely mirror the price movement of gold.

I am using /GC in place of gold prices, for this second version of the risk appetite index. This index, unlike the simple index, is cumulative over a given time period, but is still a relative index. The formula is as follows:

Risk appetite index, take 2.In this formula, y subscript i is the ith percent change in USD/JPY divided by the ith percent change in $DXY, while g subscript i is the ith percent change in $DXY divided by the ith percent change in gold.

The reason for using the square root of the squares was in order to take into account both the yen and gold as indicators. The square root of the sum of the squares is essentially the

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Daniel Goldman profile picture
I am an occasional investor/trader and researcher. I use a combination of market theory and economic theory to determine my trading strategies, but focus on periods where contrarian actions seem reasonable, such as when market expectations seem to be trending in the opposite direction as fundamentals. Research Topics I am interested in the relationship between pattern day traders and investors and how value flows between these two groups.

Analyst’s Disclosure: I am/we are long SH, VIXY, RWM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I hold a generally contrarian portfolio.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (2)

Socrates-Says profile picture
Great article, took me three readings to understand but interesting correlation. I have actually been a little confused as to what is happening in the markets. Things appear to be out of correlation, I mean you can make an argument for bearish, bullish, gold or equities. But it feels like we are awaiting a catalyst, and I feel like I should be going to cash right now in my trading account. It appears maybe your risk appetite graph is saying the same thing? Unless I missed something.
Daniel Goldman profile picture
It does seem like risk appetite is pretty low compared to what it used to be, however it's more or less been on the uptrend lately. I'm waiting to see a steeper drop in the yen/rise in gold, and higher VIX. For now, it looks more like the markets are consolidating. Still, with limited possibility of stocks going higher, I'd probably be more on the cash side.
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