Flights to Safety

Baele, Lieven, Geert Bekaert, Koen Inghelbrecht, and Min Wei, “Flights to Safety,” American Finance Association 75th Annual Meeting, Boston (2015).

Purpose:  To propose an empirical definition of a “flight to safety” episode, using only stock and bond return data.

Claim:  A “flight to safety” (FTS) is a day on which

  • Bond returns are positive.
  • Equity returns are negative.
  • Bond returns are negatively correlated with stock returns.
  • Equity return volatility is large (markets are stressed).


  • Data covers bond and equity returns for 23 countries from January 1980 through January 2012.
  • In the literature, flights to liquidity may be as important as flights to quality.  Therefore, this paper looks at returns on highly-liquid 10-yeargovernment bonds.
    • German bonds are the benchmark for Eurozone countries; local government bonds are the benchmark for all others.
  • Equity returns are indexes denominated in local currencies, from Datastream International.
  • Develop a composite flight-to-safety indicator
    • Sort observations by variables that are conceptually increasing in likelihood of flight to safety.
    • Assign a ranking to each observation for each sort, then divide each ranking number by the total number of observations–the “ordinal numbers.”
    • Identify days that qualitatively appear to be “mild” flight-to-safety episodes:
      • bond returns are higher than stock returns,
      • bond returns are further above their 250-day average than are stock returns,
      • the short-term stock-bond correlation is negative,
      • the long-term stock-bond correlation is higher than the short-term correlation (it is less negative or positive),
      • equity return volatility is more than one standard deviation above its mean, and
      • short-term equity volatility is higher than long-term volatility.
    • Observations that fail to meet the qualitative test are given a FTS indicator of zero.
    • Observations that pass the test are given an indicator of 1 minus the percentage of observations failing the test that have a higher ordinal number.


  • This methodology identifies major market crashes, including October 1987, the Russia crisis of 1998, and the Lehman bankruptcy.
  • In a flight to safety
    • Bond returns are 2%-3% higher than equity returns.
    • The Yen, US Dollar, and Swiss Franc appreciate.
    • The VIX increases.
    • Consumer sentiment falls.
    • Money-markets, corporate bonds, and non-metal commodities have negative abnormal returns.
    • Liquidity suffers in both bond and equity markets.
  • Immediately following a flight to safety, economic growth and inflation decline for up to one year.