A few interesting facts emerge. First, there is a substantial decrease in correlations among government bond returns in the first sample vis-à-vis the second period. This is the opposite of equity markets where the correlation tends to increase instead. Second, the cross-sectional correlation of cryptoasset markets increases in the aftermath of the ICO-bubble burst. Third, the absence of correlation between cryptoasset markets and traditional asset classes tends to persist across subsamples. This is not the case for other asset pairs such as equity vs real estate and / or foreign exchange.

As a whole, Figure 1 shows that the cross-sectional correlation of a large set of risky assets, with cryptoassets included, possibly changes over time. This can have direct implications on the dynamics of Risk-on / Risk-off investment opportunities.
The snapshots shown above do not give any insight into how and when Risk-on or Risk-off sentiment starts to build or fade i.e. it does not show how “dense” the investment opportunity set is over time. To address this issue, we introduce an index to quantify the extent to which the market is either Risk-on or Risk-off. The index is constructed to be indicative of the strength of market-wide relationships over time.

In particular, we use this index to analyse the conditions under which cross-asset relationships are strong or weak. Given the lack of data available for cryptoasset markets, we use a reduced set of 38 global assets to construct the index. These include global equity indexes, global government and corporate bonds at different level of risk, real estate investment trusts for different regions, major foreign exchange pairs, WTI crude oil, gold, an aggregate commodity market index, as well as five major cryptoassets, including Bitcoin (BTC), Litecoin (LTC), Ripple (XRP), Dash and Monero (XMR).

The index is constructed using Principal Component Analysis (PCA) and is based on rolling standardised daily returns since January 2015. In essence, the index indicates whether Risk-on or Risk-off has become more dominant. An increase in the index indicates that there may be fewer diversification opportunities available as correlations increase.
For completeness, Figure 2 below reports the dynamics of the index for different rolling windows. We report the index using rolling periods of two years, one year, and six months of daily returns for each of the 38 assets. A few interesting facts emerge. First, there is a substantial decrease in correlations among government bond returns in the first sample vis-à-vis the second period. This is the opposite of equity markets where the correlation tends to increase instead. Second, the cross-sectional correlation of cryptoasset markets increases in the aftermath of the ICO-bubble burst. Third, the absence of correlation between cryptoasset markets and traditional asset classes tends to persist across subsamples. This is not the case for other asset pairs such as equity vs real estate and / or foreign exchange.

As a whole, Figure 1 shows that the cross-sectional correlation of a large set of risky assets, with cryptoassets included, possibly changes over time. This can have direct implications on the dynamics of Risk-on / Risk-off investment opportunities.
The snapshots shown above do not give any insight into how and when Risk-on or Risk-off sentiment starts to build or fade i.e. it does not show how “dense” the investment opportunity set is over time. To address this issue, we introduce an index to quantify the extent to which the market is either Risk-on or Risk-off. The index is constructed to be indicative of the strength of market-wide relationships over time.
In particular, we use this index to analyse the conditions under which cross-asset relationships are strong or weak. Given the lack of data available for cryptoasset markets, we use a reduced set of 38 global assets to construct the index. These include global equity indexes, global government and corporate bonds at different level of risk, real estate investment trusts for different regions, major foreign exchange pairs, WTI crude oil, gold, an aggregate commodity market index, as well as five major cryptoassets, including Bitcoin (BTC), Litecoin (LTC), Ripple (XRP), Dash and Monero (XMR).

The index is constructed using Principal Component Analysis (PCA) and is based on rolling standardised daily returns since January 2015. In essence, the index indicates whether Risk-on or Risk-off has become more dominant. An increase in the index indicates that there may be fewer diversification opportunities available as correlations increase.
For completeness, Figure 2 below reports the dynamics of the index for different rolling windows. We report the index using rolling periods of two years, one year and six months of daily returns for each of the 38 assets.