Flight-to-safety across time and market conditions

Elie Bouri and Naji Jalkh

International Review of Economics & Finance, 2024, vol. 94, issue C

Abstract: This paper examines the time-varying directional predictability from the implied volatility of risky assets, such as US stocks, to the implied volatility of less risky or safe haven assets, such as gold, cryptocurrency, foreign exchange rates, and US Treasury notes, which allows for making time and regime dependent inferences on the flight-to-safety phenomenon. The results show a positive directional predictability from the VIX to the implied volatility of gold, cryptocurrency, and foreign exchange rates in periods of high market uncertainty such as the COVID-19 outbreak and the war in Ukraine. The volatility of US Treasury notes has a different response dynamic to the VIX, switching to negative cross-correlations in some cases, given its tight link to inflationary pressure and economic policy uncertainty. The main results remain qualitatively unchanged after incorporating economic policy uncertainty and oil volatility. An additional analysis indicates that flight-to-safety is not exclusively triggered by the high volatility regime in US equities but happens at median levels too. Our findings have important implications for investors, risk managers, and policymakers regarding volatility predictability, hedging, and market stability.

Keywords: Flight-to-safety; Implied volatility; Gold; Cryptocurrency; S&P 500 VIX; US treasury notes; Foreign exchange rates; COVID-19 outbreak and war periods; Quantile dependency (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:94:y:2024:i:c:s105905602400340x

DOI: 10.1016/j.iref.2024.05.042

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