What Drives Flight to Quality?

Abstract

The returns of equities and bonds tend to be positively correlated, but in extreme situations this relation reverses. Large negative equity returns co-occur with large positive bond returns. This is potentially caused by investors reassessing their risk preferences and shifting their wealth to less risky asset classes which is frequently termed flight to quality. We examine macroeconomic factors in order to identify the driving variables using a conditional copula model. Analyzing quarterly data from 1952 to 2014 we find that the treasury bill rate is the most significant driver. This insight is useful for asset allocation and risk management.

Keywords: Dependence structure, conditional copula, flight to quality, macroeconomic factors

JEL Classification: G12, C58, E44