Abstract
This paper examines the role of asset performance, volatility, illiquidity, and monetary policy on flight-to-quality episodes. We consider flights from stocks into long and short-term Treasuries, and Moody's AAA corporate bonds. Flights are shown to be associated with stock market volatility. Illiquidity appears to have a differential effect on different types of flights, as predicted by the asset pricing model with illiquidity by Vayanos (2004).Monetary policy, lagged and contemporaneous, is shown to decrease flight incidence. Our work also links market instability with the effects of overconfidence, as measured by the profitability of the momentum strategy.
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