Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120781
Authors: 
Adrian, Tobias
Crump, Richard
Vogt, Erik
Year of Publication: 
2015
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 723
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. We further demonstrate that these findings are evidence of dynamic asset pricing theories where the time variation of the price of risk is a function of the level of the VIX.
Subjects: 
flight to safety
risk-return trade-off
dynamic asset pricing
volatility
nonlinear regressions
intermediary asset pricing
asset management
JEL: 
G01
G12
G17
Document Type: 
Working Paper

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