Flights to Safety, Volatility Risk, and Monetary Policy

73 Pages Posted: 21 Jul 2009 Last revised: 1 Mar 2025

See all articles by Claudia E. Moise

Claudia E. Moise

New York University (NYU) - Department of Finance

Date Written: December 30, 2019

Abstract

I propose a novel explanation for the flight to safety in the cross-section of assets, based on volatility risk. I argue that investors seek the safety of Treasuries because they correlate positively with volatility surprises. Conversely, they flee risky assets such as stocks, because they correlate negatively. This dynamic results in a negative stock-bond return correlation. The significant role of volatility is further evidenced through a structural VAR model that interlinks volatility, the real economy, and monetary policy. Consequently, volatility can serve as a valuable instrument in guiding monetary policy during turbulent times, and should be considered a leading economic indicator.

Keywords: Volatility, market stress, flights to safety, monetary policy, cross-section of stocks and Treasuries, structural VAR model

JEL Classification: C21, C22, E52, G12

Suggested Citation

Moise, Claudia E., Flights to Safety, Volatility Risk, and Monetary Policy (December 30, 2019). Available at SSRN: https://ssrn.com/abstract=1436124 or http://dx.doi.org/10.2139/ssrn.1436124

Claudia E. Moise (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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