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

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.