Flights to Safety

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.

Are Gold and Government Bond Safe‐Haven Assets? An Extremal Quantile Regression Analysis

“…Third, a sufficiently long data series is essential to extract a sufficient number of extremes and secure the estimation quality of the extremes. Fourth, SHA property can be market‐dependent (Baele et al ; Santis and Roberto ). Both developed and emerging markets should be included for empirical analysis.…”

Risk Control: Who Cares?

“…() and Ghysels et al . () and with the argument that this period is characterised by flight to safety behaviour (Baele et al ., ). The latter behaviour is characterised by periods of market stress (high equity return volatility) and low equity returns as investors switch to safer assets.…”

“…By contrast, the post‐2006 period is characterised by strong performance. This finding is argued to be consistent with the inverse risk‐return relationship and flight to safety behaviour observed in the post‐2006 period (Adrian et al ., ; Baele et al ., ; and Ghysels et al ., ).…”

“…The RV variable is constructed by summing squared five minute frequency S&P500 index returns, the VRP variable is constructed by taking the difference between the square of the VIX index and expectations of RV, the FTS variable represents the FTS probability based on a threshold model applied to the ordinal FTS index used in Baele et al . (), and the BAS variable is constructed using the method proposed by Roll () applied to all trades in the S&P500 index futures contract with shortest maturity…”

“…In particular, VRP has been interpreted as a measure of the representative agent's risk aversion (see, e.g., Bakshi and Madan, ; Bollerslev et al ., ; and Rosenberg and Engle, ), or macroeconomic uncertainty risk (see, e.g., Bollerslev et al ., ; and Drechsler and Yaron, ). The FTS variable captures FTS episodes whereby a switch from equity to bonds occurs during periods of market stress (see, e.g., Baele et al , , for evidence of the relationship between FTS and market liquidity). The BAS variable attempts to capture liquidity constraints that occur during periods of financial market turmoil (Nagel, ).…”