Impact of the COVID-19 outbreak on the US equity sectors: Evidence from quantile return spillovers

Abstract

The aim of this study is to examine the extreme return spillovers among the US stock market sectors in the light of the COVID-19 outbreak. To this end, we extend the now-traditional Diebold-Yilmaz spillover index to the quantiles domain by building networks of generalized forecast error variance decomposition of a quantile vector autoregressive model specifically for extreme returns. Notably, we control for common movements by using the overall stock market index as a common factor for all sectors and uncover the effect of the COVID-19 outbreak on the dynamics of the network. The results show that the network structure and spillovers differ considerably with respect to the market state. During stable times, the network shows a nice sectoral clustering structure which, however, changes dramatically for both adverse and beneficial market conditions constituting a highly connected network structure. The pandemic period itself shows an interesting restructuring of the network as the dominant clusters become more tightly connected while the rest of the network remains well separated. The sectoral topology thus has not collapsed into a unified market during the pandemic.

Government responses to COVID-19 and industry stock returns

“…Instead, previous studies (e.g., Rababah et al, 2020) apply an event study to uncover the effect of the COVID-19 outbreak on stock sector returns in China. Shahzad et al (2021aShahzad et al ( , 2021b indicate evidence of heterogeneity in the pandemic effect on the performance of the American and Chinese equity sectors and their relationships. Secondly, our current study addresses a research gap that involves the context of New Zealand and considers the heterogeneity of the industry stock returns.…”

Gold against Asian Stock Markets during the COVID-19 Outbreak

“…The COVID-19 outbreak has adversely affected firms' solvency (Mirza et al 2020), US stock markets (Shahzad et al 2021), and other financial markets (Bouri et al 2020). This can be true to the Asian stock markets that are globally and regionally integrated (e.g., Mohti et al (2019) and are closely linked with China due to the higher bilateral trade volume and foreign direct investment of China in Asian markets.…”

“…With the abrupt emergence of the COVID-19 outbreak in early 2020, the global economy froze, unemployment rates climbed, and financial markets tumbled (Yousaf and Ali 2020aShahzad et al 2021). Such issues first affected China and other Asian stock markets and then the rest of the stock markets around the globe.…”

Safe-haven properties of soft commodities during times of Covid-19

“…For instance, Dow Jones Industrial average plunged 7.79% on March 9, 2020 and lost 9.9% again on March 12, 2020, a worst drop in the history of the US. The circuit breakers of S&P 500 triggered four times in March 2020 due to unprecedented heavy losses to equity investors ( Shahzad et al, 2021a , Shahzad et al, 2021b ). In addition, the global average impact of COVID-19 on economies has been estimated to be a 4.4% decline in global GDP growth.…”