The dark side of “flight-to-safety”: Evidence from macroeconomic tail risk beta

Shouyu Yao, Keyao Li, Chunfeng Wang, Zhenming Fang and Tong Li

Economics Letters, 2024, vol. 241, issue C

Abstract: This study examines the impact of “flight-to-safety” (FTS) on price efficiency in the stock market, where FTS is driven by investors’ demand to hedge against macroeconomic tail risk (MTR). Stocks with higher MTR beta exhibit greater returns at higher MTR levels, suggesting a stronger capacity to hedge against MTR. We find that stocks with higher MTR beta are associated with lower price efficiency, and this negative effect intensifies with increased economic policy uncertainty. By examining the mechanism, we find that investors, particularly institutional investors, favor stocks with higher MTR beta, resulting in excessive net buying pressure and liquidity constraints. This overenthusiasm for safe-haven assets hinders the incorporation of information into stock prices, thereby reducing price efficiency.

Keywords: Macroeconomic tail risk; Price efficiency; Crowded trading; Institutional herding (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:241:y:2024:i:c:s0165176524002799

DOI: 10.1016/j.econlet.2024.111795

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