COVID-19 pandemic and risk dynamics of financial markets in G7 countries

Abstract

Purpose The purpose of this study is twofold: to examine the effects of the COVID-19 pandemic on the risk dynamics of stock and bond markets in G7 countries; and to examine if the stock-bond risk dynamics can be linked to government measures to contain the pandemic. Design/methodology/approach To examine the pandemic impact on the risk dynamics of the bond and stock markets, this study chooses G7 countries for their efficient financial market properties. This study uses standard generalized autoregressive conditional heteroskedasticity (GARCH) (1,1) and exponential GARCH (1,1) models to determine the most volatile and sensitive market, most persistent market during the crisis and the leverage effect between stock and bond markets. This study then uses a panel study to investigate whether this volatility in stock and bond markets is affected by the COVID-19 cases and various government responses (fiscal stimulus packages, monetary policy, emergency investment in health care and vaccine investment). Findings The findings of the study confirm that the bad news of the pandemic is causing higher volatility than good news for all seven stock markets. Canadian stock and bond markets are the most volatile, and Italian bond and stock markets are the most sensitive G7 countries. Japan has shown the highest persistence, and the stock market exhibits higher leverage than the bond market. Fiscal stimulus packages are helping to reduce bond market volatility, but none of these measures are effective in the stock market. Research limitations/implications The pandemic is still spreading, and the rate at which it spreads wildly will always pose a limitation to any attempt to examine its full effect. Practical implications Investigation of market volatility will help policymakers and market players formulate the best strategies to overcome and exit the crisis and plan post-pandemic solutions. It provides valuable insights for investors to rebalance their portfolios during highly volatile markets while preserving their risk appetite and investment objectives. Originality/value The paper provides evidence on the impact of the pandemic-induced crisis and the respective government responses on the volatility of competing capital markets (stock and bond) in countries that are considered most efficient in reflecting news.

Covid-19 Pandemic and Exit Policy Strategy: A Cluster Analysis using R

“…A wide range of marketbased indicators can help measure financial market participants' assessment of the economy and current conditions to inform decisions about changes in financial policy settings (Muzi et al, 2022). Ensure transparency and information that can be used by market participants to assess the viability of the company (Mobin, 2022).…”

“…Now, as policy space is constrained and firms and people have reduced financial buffers, COVID-19-related vulnerabilities may materialize. Moreover, the uneven global recovery increases the likelihood of negative spillovers (Mobin, 2022). And vulnerabilities that support mechanisms to prevent COVID-19 may now materialize.…”

Pemodelan Volatilitas Indeks Saham Infobank 15 Pada Era Pandemi Covid-19

“…Wabah Covid-19 memiliki dampak yang kuat terhadap volatilitas harga saham perbankan pada Kawasan Eropa, dan volatilitas meningkat selama Pandemi Covid-19 (Foglia et al, 2022). Pandemi Covid-19 juga menyebabkan volatilitas yang lebih tinggi pada pasar modal negara-negara yang tergabung dalam Kelompok G7, dimana pasar saham dan obligasi di Canada memiliki volatilitas yang paling tinggi, sementara di Italia merupakan yang paling sensitif, Jepang menunjukkan persistensi tertinggi (Mobin et al, 2022).…”

How do stock markets react to dividend announcements during the COVID-19 pandemic? Evidence from the GCC markets

“…Recently, extant studies (Krieger et al , 2021; Cejnek et al , 2021) have revealed high dividend cuts and omission rates during COVID-19. This is unsurprising due to the well-documented adverse effect of COVID-19 on various aspects of stock markets in general and corporate performance in particular (Ashraf, 2020; Harjoto and Rossi, 2021; Scherf et al , 2022; Mobin et al , 2022; Rahman et al , 2022). Nevertheless, most firms could either maintain or even increase their dividends during the pandemic to maintain more stable dividend policies in response to the crisis and signal their financial prospect (Mazur et al , 2020; Ali, 2022).…”