Flights-to-quality are the sudden, and sometimes irrational, rebalancing of investment portfolios to include more liquid and safer investments during times of uncertainty, high market volatility, or other unusual stock market environments. While previous research has explained flights-to-quality in terms of liquidity needs and credit risk premiums, this paper examines the significant statistical relationship between the VIX Index of implied market volatility and yields on U.S. Treasury bills. I found that the VIX Index explains a significant portion of U.S. Treasury yield variability and that the models become more significant and accurate as the maturity of the Treasuries increases. In terms of mispricing, the one month U.S. Treasury exhibited the largest deviation from the theoretical yield – more than 50%. Also, as the Treasuries’ maturities increased, the degree of mispricing decreased; this parallels the tendency to see a steepening yield curve during times of higher implied volatility.
Cox, C. M. (2008). Flights-to-Quality: The Effects of Market Volatility on Short Term U.S. Treasury Yields. Inquiry: The University of Arkansas Undergraduate Research Journal, 9(1). Retrieved from https://scholarworks.uark.edu/inquiry/vol9/iss1/8