Contagion of COVID-19 pandemic between oil and financial assets: the evidence of multivariate Markov switching GARCH models

Abstract

Purpose In this paper, we investigate empirically the time-frequency co-movement between the recent COVID-19 pandemic, G7stock markets, gold, crude oil price (WTI) and cryptocurrency markets (bitcoin) using both the multivariate MSGARCH models. Design/methodology/approach This paper examines the relationship between the volatilities of oil, Chinese stock index and financial assets (cryptocurrency, gold, and G7 stock indexes), for the period January 17th 2020 to December 10th 2020. It tests the presence of regime changes in the GARCH volatility dynamics of bitcoin, gold, Chinese, and G7 stock indexes as well as oil prices by using Markov–Switching GARCH model. Also, the paper estimates the dynamic correlation and volatility spillover between oil, Chinese and financial assets by using the MSBEKK-GARCH and MSDCC-GARCH models. Findings Overall, we find that all variables display a strong volatility concentrated in the first four months of Covid-19 outbreak. The paper conducts different backtesting procedures of the 1% and 5% Value-at-Risk forecasts of risk. The results find that gold has the lowest VaR. However, the Canadian and American indices have the highest VaR, for respectively 1% and 5% confidence level. The estimation results of MSBEKK-GARCH prove the volatility spillover between Chinese index, oil and financial assets. Although, the past news about shocks in the Chinese index significantly affects the current conditional volatility of financial assets. Moreover, for the high regime, the correlation increased between Chinese and G7 stock indexes which proving the contagion effect of the COVID-19 pandemic. On the contrary, the correlation decreased between Chinese-gold and Chinese-bitcoin, which confirming that gold and bitcoin can be considered as an alternative hedge for some investors during a crisis. During the COVID-19 pandemic, the correlations for the couples oil-gold and oil-bitcoin peaked. Contrary to gold, bitcoin cannot be considered as a safe haven during the global pandemic when investing in crude oil. Originality/value In contrast, comparative analysis in terms of responses to US COVID-19 pandemic, the US Covid-19 confirmed cases have relative higher impact on the co-movement in WTI and bitcoin. This paper confirms that gold is a safe haven during the COVID19 pandemic period.

Volatility spillovers and contagion between energy sector and financial assets during COVID-19 crisis period

“…Studying the relation between stock markets and oil prices and vice versa began with Hamilton's (1983) work. Current pieces of Literature in this concern have expanded this research to the financial market and similar results have been identified (Arouri & Rault, 2010;Aydogan, 2017;Ghorbel & Jeribi, 2021b;Narayan & Gupta, 2015;Salisu et al, 2019). The latest instability in the global economy as a result of the COVID-19 outbreak has gained a great deal of interest, including the interaction among movements in oil prices, the economy, and stock markets.…”

“…For decades and through various crises, the yellow metal has historically been viewed as a safe haven asset in periods of financial uncertainty (Bouri et al, 2020;Ghorbel & Jeribi, 2021a, 2021bJareno et al, 2020;Selmi et al, 2018;Vardar et al, 2018). Gold values have risen significantly since the global economic and financial crises, while other commodities have sustained declines (Beckmann et al, 2015;Fakhfekh et al, 2021).…”

“…Adekoya and Oliyide (2021) and Gorbel and Jeribi (2021b) show that the latter cited pandemic is responsible for risk transmission across commodity and financial markets. Contrary to gold, Ghorbel and Jeribi (2021b) found that Bitcoin cannot be considered as a safe haven during the global pandemic when investing in crude oil.…”

COVID-19 Pandemic and Romanian Stock Market Volatility: A GARCH Approach

“…Agarwalla et al (2021) documented that the rescue package had limited the extreme tail risks, but the volatility level persisted at a high level. Ghorbel and Jeribi (2021) claimed that equity indices and financial assets rely not only on their earlier volatility, but also on the preceding volatility of the fuel prices. Therefore, in the aftermath of SARS-CoV-2 virus diffusion, the unpredictability in stock exchanges substantially increased, thus causing huge shortfalls for investors (Farid et al 2021).…”

“…;Ghorbel and Jeribi 2021;Harjoto and Rossi 2021;Haroon and Rizvi 2020;Hongsakulvasu et al 2020;Insaidoo et al 2021;Le and Tran 2021;Liu et al 2021b;Malik et al 2021;Mariana et al 2021; Omane-Adjepong and Alagidede 2021;Szczygielski et al 2021aSzczygielski et al , 2021bUddin et al 2021; Vera-Valdés 2021;Xu 2021;Yousaf 2021;Yousfi et al 2021;Yu et al 2021;Zhang and Hamori 2021;Zoungrana et al 2021). These models simultaneously evaluate and test processes of yields and volatility processes.…”