Flights to Safety

59 Pages Posted: 29 Jun 2014

See all articles by Lieven Baele

Lieven Baele

Tilburg University - Department of Finance

Geert Bekaert

Columbia Business School - Finance and Economics

Koen Inghelbrecht

Ghent University - Department of Economics

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs

Multiple version iconThere are 5 versions of this paper

Date Written: June 11, 2014

Abstract

Using only daily data on bond and stock returns, we identify and characterize flight to safety (FTS) episodes for 23 countries. On average, FTS days comprise less than 3% of the sample, and bond returns exceed equity returns by 2.5 to 4%. The majority of FTS events are country-specific not global. FTS episodes coincide with increases in the VIX and the Ted spread, decreases in consumer sentiment indicators and appreciations of the Yen, Swiss franc, and US dollar. The financial, basic materials and industrial industries under-perform in FTS episodes, but the telecom industry outperforms. Money market instruments, corporate bonds, and commodity prices (with the exception of metals, including gold) face abnormal negative returns in FTS episodes. Hedge funds, especially those belonging to the "event-driven" styles, display negative FTS betas, after controlling for standard risk factors. Liquidity deteriorates on FTS days both in the bond and equity markets. Both economic growth and inflation decline right after and up to a year following a FTS spell.

Keywords: flight-to-safety, flight-to-quality, stock-bond return correlation, liquidity, hedge funds

JEL Classification: G11, G12, G14, E43, E44

Suggested Citation

Baele, Lieven and Bekaert, Geert and Inghelbrecht, Koen and Wei, Min, Flights to Safety (June 11, 2014). FEDS Working Paper No. 2014-46. Available at SSRN: https://ssrn.com/abstract=2459537 or http://dx.doi.org/10.2139/ssrn.2459537

Lieven Baele

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 3257 (Phone)
+31 13 466 2875 (Fax)

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Koen Inghelbrecht

Ghent University - Department of Economics ( email )

Sint-Pietersplein 5
Ghent, B-9000
Belgium
+32 9 264 89 77 (Phone)

HOME PAGE: http://users.ugent.be/~kjinghel/

Min Wei (Contact Author)

Board of Governors of the Federal Reserve - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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