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Stocks and bonds: Flight-to-safety for ever?

Author

Listed:
  • Boucher, Christophe
  • Tokpavi, Sessi

Abstract

This paper gives new insights about flight-to-safety from stocks to bonds, asking whether the strength of this phenomenon remains the same in the current environment of low yields. The motivations lie in the conjecture that when yields are low, the traditional motives of flight-to-safety (wealth protection, liquidity) could not be sufficient, inducing weaker flight-to-safety events. Empirical applications using data for U.S. government bonds and the S&P 500 index, show indeed that when yields are low, the strength of flight-to-safety from stocks to bonds weakens. This result holds, even when controlling for the effects of traditional flight-to-safety factors including the VIX, the TED spreads and the overall level of illiquidity in the stock market. Moreover, we develop a bivariate model of flight-to-safety transfers that measures to what extent the strength of flight-to-safety from stocks to bonds is related to the strength of flight-to-safety from stocks to other safe haven assets (gold and currencies). Results show that when the strength of flight-to-safety from stocks to bonds decreases the strength of flight-to-safety from stocks to these safe haven assets increases. This result holds only in the low-yield environment, suggesting a kind of substitution effect of save haven assets, similar to the reaching for yield behavior.

Suggested Citation

  • Boucher, Christophe & Tokpavi, Sessi, 2019. "Stocks and bonds: Flight-to-safety for ever?," Journal of International Money and Finance, Elsevier, vol. 95(C), pages 27-43.
  • Handle: RePEc:eee:jimfin:v:95:y:2019:i:c:p:27-43
    DOI: 10.1016/j.jimonfin.2019.03.002
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    Citations

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    Cited by:

    1. Ming, Lei & Yang, Ping & Liu, Qianqiu, 2023. "Is gold a hedge or a safe haven against stock markets? Evidence from conditional comoments," Journal of Empirical Finance, Elsevier, vol. 74(C).
    2. Mensi, Walid & Rehman, Mobeen Ur & Maitra, Debasish & Al-Yahyaee, Khamis Hamed & Vo, Xuan Vinh, 2023. "Frequency spillovers and portfolio risk implications between Sukuk, Islamic stock and emerging stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 91(C), pages 139-157.
    3. Janus, Jakub, 2022. "Cross-border flights to safe assets in bond markets: evidence from emerging market economies," MPRA Paper 113875, University Library of Munich, Germany.
    4. Papadamou, Stephanos & Fassas, Athanasios P. & Kenourgios, Dimitris & Dimitriou, Dimitrios, 2021. "Flight-to-quality between global stock and bond markets in the COVID era," Finance Research Letters, Elsevier, vol. 38(C).
    5. Janus, Jakub, 2023. "Flights to safe assets in bond markets: Evidence from emerging market economies," Journal of International Money and Finance, Elsevier, vol. 139(C).
    6. Semeyutin, Artur & Downing, Gareth, 2022. "Co-jumps in the U.S. interest rates and precious metals markets and their implications for investors," International Review of Financial Analysis, Elsevier, vol. 81(C).
    7. Deng, Chao & Su, Xiaojian & Wang, Gangjin & Peng, Cheng, 2022. "The existence of flight-to-quality under extreme conditions: Evidence from a nonlinear perspective in Chinese stocks and bonds' sectors," Economic Modelling, Elsevier, vol. 113(C).
    8. Makushkin, Mikhail & Lapshin, Victor, 2020. "Modelling tail dependencies between Russian and foreign stock markets: Application for market risk valuation," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 57, pages 30-52.
    9. Yadav, Jayant, 2020. "Flight to Safety in Business cycles," MPRA Paper 104093, University Library of Munich, Germany.
    10. Lehnert, Thorsten, 2022. "Flight-to-safety and retail investor behavior," International Review of Financial Analysis, Elsevier, vol. 81(C).
    11. Paresh Kumar Narayan & Syed Aun R. Rizvi & Ali Sakti, 2022. "Did green debt instruments aid diversification during the COVID-19 pandemic?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-15, December.
    12. Rizvi, Syed Kumail Abbas & Naqvi, Bushra & Mirza, Nawazish & Umar, Muhammad, 2022. "Safe haven properties of green, Islamic, and crypto assets and investor's proclivity towards treasury and gold," Energy Economics, Elsevier, vol. 115(C).
    13. Cheng, Xin & Chen, Hongyi & Zhou, Yinggang, 2021. "Is the renminbi a safe-haven currency? Evidence from conditional coskewness and cokurtosis," Journal of International Money and Finance, Elsevier, vol. 113(C).

    More about this item

    Keywords

    Bonds stocks relationship; Flight-to-safety; Low-yield environment; Bond alternatives; Currencies; Gold;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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