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Is there a flight to quality? : a study on flight to quality within the equity markets

Ferrante-Bannera, Adrian; Sandøy, Maren
Master thesis
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URI
https://hdl.handle.net/11250/2772254
Date
2021
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  • Master Thesis [4657]
Abstract
Much of the research on flight to quality use different definitions of "flight" and "quality",

making the findings difficult to compare. The coherent story behind this phenomenon is

that investors become risk-averse during market distress and flee to safer asset classes. In

this thesis, we test whether there is a flight to quality within the equity markets, using a

broadly accepted definition of quality and institutional investor holdings data. We measure

the portfolio share of institutional investors that are allocated in high- and low-quality

stocks and compare it to the market share of high- and low-quality stocks. We find that

both the market share of quality stocks and the investor bet on quality increase during

recessions. We look at the active bets investors make in quality stocks by subtracting

the market share of quality. We find evidence that there is a flight to high-quality stocks

during recessions but we do not find evidence that investors flee low-quality stocks. We

also find that investors seek quality stocks, but do not only look at safety characteristics.

This thesis extends the financial literature on the topic of flight to quality to include the

equity markets.

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