Sudden equity price declines and the flight-to-safety phenomenon: additional evidence using daily data

Using daily data we show sudden, extreme declines in the U.S. stock market for crash dates to lead to a capital preserving (as opposed to strategic or tactical) reallocation to government debt securities. In most cases we find flight-induced reallocation reverses direction within one day of a crash. However, for the 1987 world crash we find increased and persistent return volatility in both equity and bond returns lasting up to five days following this dramatic decline in world equity prices. Like previous research in this area, we find equity crashes alter long-run stock/bond return correlations and lead to increased stock and bond return volatility. Finally, we describe the somewhat unique stock and bond correlation adjustments triggered by the 9/11 attack and the impact this event had on the behavior of U.S. equity investors’ flight-to-safety reaction.