Flight-to-quality or contagion effect? An analysis from the Turkish and the US financial markets

Gencer, Hatice Gaye

doi:10.3326/fintp.39.4.

Flight-to-quality or contagion effect? An analysis from the Turkish and the US financial markets

Hatice Gaye Gencer, Yeditepe University, İnönü Mah. Kayışdağı Cad. 26 Ağustos Yerleşimi, İstanbul, Turkey

Abstract
In this paper, we investigate the presence of flight-to-quality from stocks to bonds as they are the two alternative asset classes predominantly used for hedging investment risk. A negative correlation between stock and bond markets is taken as a prognostication of flight-to-quality, while a positive correlation can be taken as a sign of contagion between the markets. We analyze the Turkish and US stock and government bond markets between June 6, 2006 and November 29, 2013, to make a comparison between the diversification benefits in a developed and an emerging market economy. We further divide our sample into two sub-periods to compare the patterns in crisis and tranquil periods. Our results reveal the existence of flight-to-quality in Turkey, whereas we find significant positive correlations between stocks and bonds in the US, implying a contagion effect. Additionally, we design portfolios of bonds/stocks and compute optimal weights and hedge ratios of the assets.

Keywords: bonds, stocks, portfolio investments

Year: 2015 | Volume: 39 | Issue: 3 | Pages: 325 - 340