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Stress Testing Market Report - Risk On, Risk Off in a Multifactor World - August 2012

The term “risk on, risk off” has become a common way to describe the challenges of recent market behavior. In the “risk on” scenario, investors display a greater appetite to buy “risky” assets, thus increasing equity prices. During periods of “risk off” behavior, risk aversion increases and flight-to-quality pushes equity prices lower, while “safe haven” assets outperform. In this paper, we examine how factors in the Barra Integrated Model (BIM301) behave under “risk on, risk off” conditions. The identification of these regimes allows us to specify “risk on, risk off” stress tests in BarraOne.