Tail risk and Flight-to-Safety

Xinyang Li ()
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Xinyang Li: BlackRock Inc

Journal of Asset Management, 2025, vol. 26, issue 4, No 4, 386-410

Abstract: Abstract Using information from equity and Treasury bond options, I propose a new Flight-to-Safety (FTS) regime-switching model with time-varying stock-bond correlation and regime-switching probabilities. I document that the inclusion of higher-order moments such as tail risks is crucial to capturing Flight-to-Safety. In particular, heightened bond tail risk tends to diminish investors’ inclination toward Flight-to-Safety, and time-varying tail risk correlation helps explain return correlation. With verified forecasting performance, I then apply my model with FTS probability-based asset allocation to prove that it significantly outperforms other standard strategies.

Keywords: Flight-to-Safety; Tail risk; Stock-bond correlation; Regime-switching (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41260-025-00407-1

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