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Flight-to-quality, economic fundamentals, and stock returns

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  • Kaul, Aditya
  • Kayacetin, Nuri Volkan

Abstract

We find that the order flow differential (OFD), a flight-to-quality measure constructed as the difference between large- and small-cap stock order flows, strongly and negatively forecasts output growth and interest rates in the U.S. The predictive ability of OFD for future macroeconomic fundamentals is robust to the inclusion of return factors and business cycle predictors, and it is thus a state variable candidate in the spirit of Merton (1973). Consistent with this view, we document that OFD commands a statistically significant negative risk premium in cross-sectional asset pricing tests.

Suggested Citation

  • Kaul, Aditya & Kayacetin, Nuri Volkan, 2017. "Flight-to-quality, economic fundamentals, and stock returns," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 162-175.
    • Handle: RePEc:eee:jbfina:v:80:y:2017:i:c:p:162-175
    DOI: 10.1016/j.jbankfin.2017.04.003
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    Cited by:

    1. Ellington, Michael, 2018. "Financial market illiquidity shocks and macroeconomic dynamics: Evidence from the UK," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 225-236.

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    More about this item

    Keywords

    Order flow; Flight-to-quality; Economic conditions; Hedging; Liquidity; SMB;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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