Applying the Inclan-Tsiao breakpoint algorithm in the search for the flight-to-safety phenomenon

Kenneth Smith and Joe Brocato

Applied Financial Economics, 2010, vol. 20, issue 5, 371-380

Abstract: The focus of this article is to examine the recent historical record of the US equity and government bond markets in an attempt to associate negative return correlations between the two series to identify flight-to-safety episodes. Using the Inclan-Tsiao algorithm to date changes in equity market volatility, we find evidence of a flight-to-safety phenomenon. The method allows us to identify the dates where the equity index is negative coupled with positive government bond movements. Most of these observations occur during the worldwide crash of October 1987.

Date: 2010
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DOI: 10.1080/09603100903373264

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