No. 1311 - Equity tail risk in the treasury bond market

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by Dario Ruzzi and Mirco RubinDecember 2020

This study adds to the empirical literature on the identification and estimation of the risk factors that affect and can predict future trends in the Treasury bond market. In particular, we examine the short-term impact of the risk associated with large negative price jumps in the stock market on the prices of and demand for Treasuries.

The risk of large negative price jumps in the stock market leads to an instantaneous significant increase in Treasury bond prices, with the effect persisting even in the following month. These relationships are observed not only in the US markets but also in some major European markets. Consistent with the observed effect on prices, funds flow from equities into bonds when the risk of stock price jumps is higher.

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