What Makes a Safe Haven? Equity and Currency Returns for Six OECD Countries during the Financial Crisis

We estimate dynamic conditional correlations (DCCs) between equity and currency returns during the financial crisis using Engle's (2002) model. DCCs and their volatilities increased for all countries, increasing investors' risk aversion and leading to the "flight-to-quality". The US, Japan, and Switzerland have negative DCCs, making them "safe havens" that experienced capital inflows, whereas the UK, Australia, and Canada have positive DCCs. Stock and foreign exchange volatility indexes increase DCCs for countries without safe assets; however, they decrease DCCs for countries with safe assets. Higher country-specific risk, as measured by its TED spread, and CDS spread, means higher DCCs.