Abstract
The relationship of equities and bonds is essential in financial markets. The returns of these two asset classes tend to be positively correlated, but in extreme situations this relation reverses. Large negative equity returns co-occur with large positive bond returns. This is potentially caused by investors reassessing their risk preferences and shifting their wealth to less risky asset classes, which is frequently termed flight to quality. We examine macroeconomic factors in order to identify the driving variables. We find that the treasury bill rate is the most significant driver. Furthermore, the growth rates of the gross domestic product and personal consumption expenditures as well as the inflation rate have a significant impact on flight to quality. These results are useful for investors to improve their asset allocation decisions.
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