Examining the flight-to-safety with the implied volatilities

Abstract

This paper investigates the flight-to-safety phenomenon by examining the interactions between the stock market volatility (VIX) and volatilities of the Treasury note, gold, and silver markets. We find that increases in VIX lead to contemporaneous and delayed increases in the volatilities of T-note, gold, and silver prices. The VIX Granger causes the volatilities of T-note, gold, and silver markets, but the latter volatilities do not predict the stock market volatility. Changes in VIX explain more of volatility increases in T-note and gold prices during the financial crisis than in other periods. The leading positive effect of VIX on other expected volatilities, along with the possible negative asset correlations, complements the cross-market hedging and is consistent with the flight-to-safety phenomenon.