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

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  • Kenneth Smith
  • Joe Brocato

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.

Suggested Citation

  • Kenneth Smith & Joe Brocato, 2010. "Applying the Inclan-Tsiao breakpoint algorithm in the search for the flight-to-safety phenomenon," Applied Financial Economics, Taylor & Francis Journals, vol. 20(5), pages 371-380.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:5:p:371-380
    DOI: 10.1080/09603100903373264
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    References listed on IDEAS

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    1. Dungey, Mardi & Fry, Renee & Gonzalez-Hermosillo, Brenda & Martin, Vance, 2006. "Contagion in international bond markets during the Russian and the LTCM crises," Journal of Financial Stability, Elsevier, vol. 2(1), pages 1-27, April.
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    4. Simon H. Kwan, 1996. "On the relation between stocks and bonds, part I," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun28.
    5. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    6. Brocato, Joe & Steed, Steve, 1998. "Optimal Asset Allocation over the Business Cycle," The Financial Review, Eastern Finance Association, vol. 33(3), pages 129-148, August.
    7. Smith, Kenneth L. & Swanson, Peggy E., 2008. "The dynamics among G7 government bond and equity markets and the implications for international capital market diversification," Research in International Business and Finance, Elsevier, vol. 22(2), pages 222-245, June.
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    Cited by:

    1. Joe Brocato & Kenneth Smith, 2012. "Sudden equity price declines and the flight-to-safety phenomenon: additional evidence using daily data," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(3), pages 712-727, July.

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