Description:
This paper discusses the role that stock market volatility plays in the linkages between the U.S. stock and Treasury bond markets through liquidity under different regimes of investor sentiment. The baseline analysis shows the interaction between volatility and illiquidity dynamics coincides with the flight-to-safety phenomenon. Moreover, the empirical evidence points to the existence of flight-from-maturity where market participants tend to shorten their lending for precautionary purposes. This relationship is verified in the period after the Global Financial Crisis (GFC). An adverse stock market volatility shock also increases the probability of moving from a high sentiment to a low sentiment regime