Flights and Contagion - an Empirical Analysis of Stock-Bond Correlations

Abstract

This paper analyzes the existence of flights from stocks to bonds and vice versa. We propose a definition and a test for flight-to-quality, flight-from-quality and cross-asset contagion and examine their characteristics and effects for the financial system. The empirical analysis for eight developed countries including the US, the UK, Germany and Japan shows that flights exist and are a common feature in many crises episodes. Our findings also reveal that flights are not merely country-specific events but occur simultaneously across countries. This indicates that there is a link between the occurrence of flights and cross-country contagion. Moreover, we show that flights enhance the resiliency of the financial markets by providing diversification benefits in times when they are needed most.

Keywords: flight-to-quality, flight-from-quality, cross-asset contagion, cross-country contagion, multivariate GARCH, panel regression

JEL Classification: F36, F37, G11, G14, G15