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Flights to Safety

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Author Info

  • Baele, Lieven

    ()
    (Tilburg University)

  • Bekaert, Geert

    ()
    (Columbia University)

  • Inghelbrecht, Koen

    ()
    (Ghent University)

  • Wei, Min

    ()
    (Board of Governors of the Federal Reserve System (U.S.))

Abstract

Using only daily data on bond and stock returns, we identify and characterize flight to safety (FTS) episodes for 23 countries. On average, FTS days comprise less than 3% of the sample, and bond returns exceed equity returns by 2.5 to 4%. The majority of FTS events are country-specific not global. FTS episodes coincide with increases in the VIX and the Ted spread, decreases in consumer sentiment indicators and appreciations of the Yen, Swiss franc, and US dollar. The financial, basic materials and industrial industries under-perform in FTS episodes, but the telecom industry outperforms. Money market instruments, corporate bonds, and commodity prices (with the exception of metals, including gold) face abnormal negative returns in FTS episodes. Hedge funds, especially those belonging to the "event-driven" styles, display negative FTS betas, after controlling for standard risk factors. Liquidity deteriorates on FTS days both in the bond and equity markets. Both economic growth and inflation decline right after and up to a year following a FTS spell.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2014-46.

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Length: 59 pages
Date of creation: 05 Jun 2014
Date of revision:
Handle: RePEc:fip:fedgfe:2014-46

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Keywords: Flight-to-safety; flight-to-quality; stock-bond return correlation; liquidity; hedge funds;

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References

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Cited by:
  1. Bijsterbosch, Martin & Guérin, Pierre, 2013. "Characterizing very high uncertainty episodes," Economics Letters, Elsevier, vol. 121(2), pages 239-243.
  2. Habib, Maurizio Michael & Stracca, Livio, 2013. "Foreign investors and risk shocks: seeking a safe haven or running for the exit?," Working Paper Series 1609, European Central Bank.
  3. Stracca, Livio, 2013. "The global effects of the euro debt crisis," Working Paper Series 1573, European Central Bank.

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