Citation

Discussion Paper Details

Please find the details for DP11401 in an easy to copy and paste format below:

Full Details

Title: Nonlinearity and Flight-to-Safety in the Risk-Return Tradeoff for Stocks and Bonds

Author(s): Tobias Adrian, Richard K. Crump and Erik Vogt

Publication Date: July 2016

Keyword(s): asset management, dynamic asset pricing, flight-to-safety, intermediary asset pricing, nonparametric estimation and inference, risk-return tradeoff and volatility

Programme Area(s): Financial Economics

Abstract: We document a highly significant, strongly nonlinear dependence of stock and bond returns on past equity market volatility as measured by the VIX. We propose a new estimator for the shape of the nonlinear forecasting relationship that exploits additional variation in the cross-section of returns. The nonlinearities are mirror images for stocks and bonds, revealing flight-to-safety: expected returns increase for stocks when volatility increases from moderate to high levels while they decline for Treasuries. These findings provide support for dynamic asset pricing theories where the price of risk is a nonlinear function of market volatility.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11401

Bibliographic Reference

Adrian, T, Crump, R and Vogt, E. 2016. 'Nonlinearity and Flight-to-Safety in the Risk-Return Tradeoff for Stocks and Bonds'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11401