Last year we introduced the Qontigo ROOF Scores as a quantification of investor sentiment. The methodology uses the factor returns from eight style factors of Axioma’s short-horizon fundamental factor risk models, plus two indicators of market risk, to define the current level of risk appetite in the market. The idea behind this methodology is simple; by mapping various style factors in our model to a risk-tolerant or a risk-averse strategy type, and using the factor returns as a measure of each strategy’s ‘popularity’ on that day, we can compute an aggregate measure of investor risk appetite (a.k.a. Risk-On, Risk-Off, or ROOF Score).
The styles investors favor on any given day, risk tolerant or risk averse, tell us whether they are feeling bullish or bearish. A big enough imbalance between the demand (bullish) and supply (bearish) for risk will tend to move markets in the direction of equilibrium via premiums or discounts on stock prices. In this paper we extend our methodology to individual sector portfolios as a means to establish their ‘personality’ and use their daily ‘popularity’ as building blocks for an aggregate sector-based market ROOF Score.