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The flight-to-quality effect: a copula-based analysis

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Abstract:

Abstract

We derive and estimate a copula combining the features of the Frank and Gumbel copulas to analyse the relationship between equity and long-term bond returns. Our analysis of quarterly returns from 1952 to 2003 finds that, in general, there is a positive relationship between equity returns and bond returns. In extreme situations, however, there is approximately a one-in-seven chance of a flight-to-quality effect where large negative equity returns are associated with large positive bond returns.

Keywords: Copulas; Flight-to-quality; G12; Tail dependence

Document Type: Research Article

DOI: https://doi.org/10.1111/j.1467-629X.2009.00320.x

Affiliations: 1: UWA Business School, University of Western Australia, Crawley, 6009, Australia 2: MaSt services GmbH & Co. KG, Gottfried-Daniels-Straße 1, 50825 Köln, Germany 3: Department of Economics, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany

Publication date: 2010-06-01

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