Return connectedness across asset classes around the COVID-19 outbreak

Abstract

In this paper, we show evidence of a dramatic change in the structure and time-varying patterns of return connectedness across various assets (gold, crude oil, world equities, currencies, and bonds) around the COVID-19 outbreak. Using the TVP-VAR connectedness approach, the results show that the dynamic total connectedness across the five assets was moderate and quite stable until early 2020. After that, the total connectedness spikes and the structure of the network of connectedness alters, which concurs with the COVID-19 outbreak. The equity and USD indices are the primary transmitters of shocks before the outbreak, whereas the bond index becomes the main transmitters of shocks during the COVID-19 outbreak. However, the USD index is a net receiver of shocks to other assets during the outbreak period. Furthermore, using a recently developed newspaper-based index of uncertainty in financial markets due to infectious diseases to capture the recent impact of Covid-19, we find that connectedness is positively related to this index, and increases at higher levels (conditional quantiles) of connectedness. Overall, our results reflect the speedy disturbing effects of the COVID-19 outbreak, which matters to the formulations of policies seeking to achieve financial stability. The results also indicate a possibility to threaten investors' portfolios and fade the benefits of diversification.

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

“…Our work is closely related to recent research on the effects of COVID-19 within the literature on economics and finance. Notably, it nicely complements the growing literature on the effects of COVID-19 on financial markets (e.g., Alola et al 2020 ; Aloui et al 2020 ; Bouri et al 2020 ; Shahzad et al 2020 ; Sharif et al 2020 ; Gupta et al 2021 ), which has so far ignored the impact of this catastrophic event on extreme co-movements among the US equity sectors.…”

“…The energy and material sectors are not driven by global risk aversion. The role of fear and uncertainty in the dynamic connectedness structure of financial markets is highlighted by recent studies (e.g., Bouri et al 2020 ; Sharif et al 2020 ; Gupta et al 2021 ) showing that the dynamics are non-linear and strongly pronounced during the COVID-19 pandemic. These recent findings also concord with evidence put forward by Hesse and Frank ( 2009 ) linking funding stress and equity markets in advanced economies during the financial crisis.…”

Infectious Diseases-Energy Futures Nexus: A Quantile-on-Quantile Approach

“…Our study is relevant as disease outbreaks, such as the current COVID-19 pandemic, can distort economic activities, causing economic and financial uncertainties, triggering increased unemployment. These resultant consequences may lead to international financial chaos that disturbs asset allocations and risk management and, most notably, financial stability (Bouri et al, 2020). According to Qin et al (2020), the COVID-19 pandemic had a substantial negative net effect on oil prices by as much as 80%.…”

“…However, this often-held negative assertion may change as a pandemic outbreak may trigger a negative supply shock, driving up prices (Qin et al, 2020). Therefore, a study of this nature may help investors re-stabilize their portfolios, switching from risky assets to safe-haven assets in order to mitigate portfolio risks (Bouri et al, 2020).…”

Can Uncertainty Due to Pandemic Predict Asia-Pacific Energy Stock Markets?

“…The motivation for our study is threefold. First, the current COVID-19 pandemic has shown that stock markets and financial markets of many countries are sensitive to the pandemic (see, Bouri et al, 2020). Second, uncertainty that created by pandemics that impact health have significant influence on investors' actions (Baker et al, 2020) and sentiments (HaiYue et al, 2020).…”