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

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  • 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.

Suggested Citation

  • Hatice Gaye Gencer, 2015. "Flight-to-quality or contagion effect? An analysis from the Turkish and the US financial markets," Financial Theory and Practice, Institute of Public Finance, vol. 39(3), pages 325-340.
    • Handle: RePEc:ipf:finteo:v:39:y:2015:i:3:p:325-340
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    More about this item

    Keywords

    bonds; stocks; portfolio investments;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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