Cross-border flights to safe assets in bond markets: evidence from emerging market economies

This paper investigates cross-border flights to safety (FTS) in sovereign bond markets from the perspective of emerging market economies (EMEs). Accurate identification of such events provides a detailed picture of sharp changes in prices of international assets and potential sources of EMEs' financial fragility. We construct new measures of the FTS occurrence and magnitude by focusing on extreme movements in long-term bond markets vis-à-vis the US for a diverse group of 21 EMEs. An adaptable time-series anomaly detection algorithm is used to recognize patterns in daily data on bond returns from 2002 to 2021. The paper shows that the FTS episodes in the entire sample of EMEs turn out to be short-lived and map well into periods of international financial and economic downturns. We demonstrate the importance of global uncertainty shocks and the US dollar exchange rate fluctuations in driving FTS, with the relative importance of the latter factor increasing after the Global Financial Crisis. The results from panel data models indicate that a range of country-specific economic, financial, and political factors matter visibly more for the FTS magnitude than their mere occurrence. This supports the notion that flights from bond markets are triggered mainly by shocks originating outside of EMEs, but the magnitude of these events may materially depend on their domestic conditions, including macroeconomic stability and policy factors. However, the role of economic fundamentals in driving FTS seems to subside post-2010 at the expense of financial factors. As a by-product, we present a database on FTS episodes in bond markets.