(COVID-19)-Induced Flight to Quality


  • Anya Khanthavit Thammasat University


financial crisis, flight to safety, return correlation


During crises, investment re-allocation from risky to safe assets, constitutes a flight to quality market environment. This study investigates the flight to quality in Thailand from risky stocks to safe government bonds. It describes returns using the modified, conditional regression model, and extracts the unobserved abnormal returns using the Kalman filtering technique. Estimates of abnormal returns were used in tests for the Granger causality of stocks to bonds, and for investigating the significance of the contributions of abnormal returns to a decreasing correlation. Flight to quality implies these test hypotheses. The data are returns representative of stocks listed on the Stock Exchange of Thailand and of bonds registered on the Thai Bond Market Association. The full period runs from August 28, 2018 to June 30, 2020, whereas the COVID-19 period covers November 18, 2019, to June 30, 2020. The return correlation in the COVID-19 period is more negative than that in the pre-(COVID-19) period. Stocks Granger cause bonds. The contribution share of COVID-19 to the falling correlation is 89.2080%. While the joint Wald-test for the non-significance of COVID-19’s contributing correlations yields a p-value of 0.1144, the impulse response analyses suggest that they are all significant. Thailand has experienced flight to quality during the COVID-19 crisis.


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