- Systematic indicator for assessing short term risks in the stock market
- The short term Rhy Risk Indicator (RRI) is based on two pillars: Psychological and technical factors
- The measurement of investor risk appetite is a central aspect of the indicator
- Risk changes are measurable
A risk assessment of the stock market alone with fundamental and technical factors is usually not sufficient. Our analyses have shown that there is a strong correlation between the risk appetite of investors and the development of stock markets in the short to medium term, so that the technical factors are complemented by psychological factors.
In order to generate a high risk or low risk signal, the technical aspects must be confirmed by the psychological factors. A signal comes first and foremost when the risk appetite has changed dramatically in a short time or when the individual factors have reached extreme values.
The special measuring method uses bandwidth instead of fixed limits, which leads to very reliable signals of the indicator. In addition, the indicator is not based on forecasts for individual factors such as interest or economic activity, as all these factors are automatically reflected in investors’ willingness to take risks.
On average, two to three signals are generated per year. In this sense, the indicator is also suitable for assessing the timing of a tactical adjustment.
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Short term RRI on the S&P 500 Index
Theoretical returns and drawdowns of a systematic trading strategy using short term signals: