Flight to Quality Research Papers (original) (raw)

SummaryThe recent Great Recession has been particularly remarkable not only for its unprecedented severity, but also for the exceptional degree of global interdependence in financial and real variables. A much‐discussed channel of... more

SummaryThe recent Great Recession has been particularly remarkable not only for its unprecedented severity, but also for the exceptional degree of global interdependence in financial and real variables. A much‐discussed channel of propagation hinges on the international exposure of the balance sheet of highly leveraged players to ‘toxic’ US assets. Yet, existing evidence on the role of exposure is mixed at best. This paper argues that under financial integration, the fact that leveraged investors face the same returns across internationally traded assets, would tend to equalize their borrowing cost across countries. Model simulations show that an unexpected increase in credit spreads in one country generates a similar increase in credit spreads in other financially integrated countries bringing about a global contraction, quite independently of the exposure to foreign assets in the balance sheet of leveraged investors. Our analysis thus suggests some caution in assessing the risks of ‘contagion’ on the exclusive basis of quantitative measures of integration based on cross‐border balance sheet exposure.— Luca Dedola and Giovanni Lombardo

The paper shows that the increase in the US current account deficit since 1997 was financed by Emerging Market economies, EMs. Since 2001 a large share of the funding was carried out by the official sector, taking mostly the form of... more

The paper shows that the increase in the US current account deficit since 1997 was financed by Emerging Market economies, EMs. Since 2001 a large share of the funding was carried out by the official sector, taking mostly the form of accumulation of international reserves. The paper argues that (1) if official funding is stopped or reversed, the private sector in EMs is likely to provide offsetting funds, preventing the US to go through a Sudden Stop episode; and (2) in the unlikely event that global saving collapses, the brunt of the adjustment is likely to be borne by EMs, e.g., through Sudden Stops, and flight to quality likely to ensure the US a smooth transition, i.e., a soft landing.

Using Treasury and corporate bond market data, I examine the propagation of firm-specific shocks as well as market-wide shocks between 1995-2003, testing the im-plications of previously proposed channels of contagion. I find little... more

Using Treasury and corporate bond market data, I examine the propagation of firm-specific shocks as well as market-wide shocks between 1995-2003, testing the im-plications of previously proposed channels of contagion. I find little support for the economic fundamental hypothesis. Consistent with the information transmission and liquidity-shock hypotheses, I find evidence of flight to quality during the event periods. However, in contrast to the prediction of the liquidity shock hypothesis, the corporate bond market seems to be more liquid during event periods. These findings are more in favor of the information channel as a means of inducing contagion.

This paper uses sales transaction data in order to examine whether flight from risk phenomena took place in the US office property investment market during the financial crisis of 2007-2009. The effect of the crisis on the pricing of... more

This paper uses sales transaction data in order to examine whether flight from risk phenomena took place in the US office property investment market during the financial crisis of 2007-2009. The effect of the crisis on the pricing of property quality attributes, mainly summarized by the class category of each building, is investigated. In addition, the paper examines how turnover levels were affected by the market downturn and whether there were significant variations between different real estate quality types. The results of the hedonic ...