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

27 Pages Posted: 2 Mar 2006 Last revised: 14 Jul 2009

See all articles by Dirk G. Baur

Dirk G. Baur

University of Western Australia - Business School; Financial Research Network (FIRN)

Brian M. Lucey

Trinity Business School, Trinity College Dublin; University of Sydney Business School; University of Economics Ho Chi Minh City

Date Written: July 2008

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

Suggested Citation

Baur, Dirk G. and Lucey, Brian M., Flights and Contagion - an Empirical Analysis of Stock-Bond Correlations (July 2008). IIIS Discussion Paper No. 122. Available at SSRN: https://ssrn.com/abstract=886119 or http://dx.doi.org/10.2139/ssrn.886119

Dirk G. Baur (Contact Author)

University of Western Australia - Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Brian M. Lucey

Trinity Business School, Trinity College Dublin ( email )

The Sutherland Centre, Level 6, Arts Building
Dublin 2
Ireland
+353 1 608 1552 (Phone)
+353 1 679 9503 (Fax)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

University of Economics Ho Chi Minh City ( email )

59C Nguyen Dình Chieu
6th Ward, District 3
Ho Chi Minh City, Ho Chi Minh 70000
Vietnam

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