Typological Classification, Diagnostics, and Measurement of Flights-to-Quality

This paper proposes a total return-based framework to study flight-to-quality phenomenon of fixed-income securities. It consists of three elements: (i) the general definition of event; (ii) the typological classification of the phenomena to be able associate them with the phases of business cycle; (iii) automated technique to diagnose the time frames and to measure the impact of flight-to-quality on debt instruments. The proposed framework is applied to analyse capital movements from Emerging Markets public debt to the U.S. Treasuries and vice versa within the period 1998-2010. The results show that different phases of business cycles and GDP rates behaviours, including turning points, could be associated with flights-to-quality of different types and nature.