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The dark side of “flight-to-safety”: Evidence from macroeconomic tail risk beta

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  • Yao, Shouyu
  • Li, Keyao
  • Wang, Chunfeng
  • Fang, Zhenming
  • Li, Tong

Abstract

This study examines the impact of “flight-to-safety” (FTS) on price efficiency in the stock market, where FTS is driven by investors’ demand to hedge against macroeconomic tail risk (MTR). Stocks with higher MTR beta exhibit greater returns at higher MTR levels, suggesting a stronger capacity to hedge against MTR. We find that stocks with higher MTR beta are associated with lower price efficiency, and this negative effect intensifies with increased economic policy uncertainty. By examining the mechanism, we find that investors, particularly institutional investors, favor stocks with higher MTR beta, resulting in excessive net buying pressure and liquidity constraints. This overenthusiasm for safe-haven assets hinders the incorporation of information into stock prices, thereby reducing price efficiency.

Suggested Citation

  • Yao, Shouyu & Li, Keyao & Wang, Chunfeng & Fang, Zhenming & Li, Tong, 2024. "The dark side of “flight-to-safety”: Evidence from macroeconomic tail risk beta," Economics Letters, Elsevier, vol. 241(C).
    • Handle: RePEc:eee:ecolet:v:241:y:2024:i:c:s0165176524002799
    DOI: 10.1016/j.econlet.2024.111795
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    References listed on IDEAS

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    More about this item

    Keywords

    Macroeconomic tail risk; Price efficiency; Crowded trading; Institutional herding;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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