The concept of « flight to quality » describes a situation where investors seek to sell assets perceived as risky and buy risk-free assets, leading to a spread of the risk premium and distortion in the credit market and other financial markets (Caballero, Kurlat 2008).
According to Vayanos (2004), the concept of « flight to liquidity » is characterized by an increase in investor risk aversion in response to increased volatility in risky asset markets. This volatility creates a search for liquidity (« flight to liquidity ») which adds to the flight to quality. These two effects increase the risk premium demanded on risky assets, leading to a « flight to liquidity » towards less risky assets.
Reference:
Dimitri Vayanos (2004): « Flight to quality, Flight to liquidity, and the Pricing of Risk, » NBER Working Papers 10327, National Bureau of Economic Research.
Ricardo J. Caballero, Pablo Kurlat (2008): « Flight to quality and bailouts: policy remarks and a literature review ».
