Risk Spillover during the COVID-19 Global Pandemic and Portfolio Management

Abstract

This paper aims to examine the volatility spillover, diversification benefits, and hedge ratios between U.S. stock markets and different financial variables and commodities during the pre-COVID-19 and COVID-19 crisis, using daily data and multivariate GARCH models. Our results indicate that the risk spillover has reached the highest level during the COVID-19 period, compared to the pre-COVID period, which means that the COVID-19 pandemic enforced the risk spillover between U.S. stock markets and the remains assets. We confirm the economic benefit of diversification in both tranquil and crisis periods (e.g., a negative dynamic conditional correlation between the VIX and SP500). Moreover, the hedging analysis exhibits that the Dow Jones Islamic has the highest hedging effectiveness either before or during the recent COVID19 crisis, offering better resistance to uncertainty caused by unpredictable turmoil such as the COVID19 outbreak. Our finding may have some implications for portfolio managers and investors to reduce their exposure to the risk in their portfolio construction.

Multivariate Analysis of Energy Commodities during the COVID-19 Pandemic: Evidence from a Mixed-Frequency Approach

“…Our results confirm that the COVID-19 pandemic increases the spillover effects and contagion among energy commodities, which, in turn, contribute to higher the level of systemic risk. These findings are in line with recent studies that show high correlations during the pandemic both in financial markets (Akhtaruzzaman et al 2021;Chevallier 2020;Yousfi et al 2021;Zaremba et al 2020;Zhang et al 2020) and in energy markets (Hauser et al 2020;Nyga-Łukaszewska and Aruga 2020). Moreover, our results suggest that the DAGM specification used in the multivariate models allows us to obtain more accurate estimates of the correlations (as also found in Candila 2021b) among commodities, and this highlights the presence of an asymmetric effect of COVID-19 on energy prices, as shown in Wang and Su (2021).…”

“…On one hand, we extended the current literature on the effects of the COVID-19 pandemic on the energy sector considering six energy commodities (West Texas Intermediate crude oil, Brent crude oil, Heating oil #2, Propane, New York Harbor Conventional Gasoline Regular, and Kerosene-Type Jet Fuel), whereas previous studies mainly focused on oil and natural gas (De Blasis and Petroni 2021;Gil-Alana and Monge 2020;Lin and Su 2021;Narayan 2020;Wang and Su 2021). On the other hand, we employed multivariate GARCH models in the energy sector (Chang et al 2011;Chkili et al 2014;Ku et al 2007;Silvennoinen and Thorp 2013;Yousfi et al 2021) within a risk management setting that, for the first time in this strand of literature, considers time series sampled at mixed-frequency. This allowed us to include the number of weekly deaths caused by the COVID-19 in the US for the estimation of daily volatilities and correlations.…”

“…Specifically, we investigate the effects of weekly deaths in the US due to COVID-19 on the daily energy commodities volatilities. We, therefore, contribute to the existing literature regarding the application of multivariate GARCH (Ku et al 2007;Yousfi et al 2021) to energy commodities (Chang et al 2011;Chkili et al 2014;Silvennoinen and Thorp 2013) where time series data are sampled only at the daily frequency. To the best of our knowledge, this is the first attempt to study the impact of COVID-19 to energy sector using a mixed-frequency approach.…”

Sovereign Bond Market Shock Spillover Over Different Maturities: A Journey from Normal to Covid-19 Period

“…Comparing between the two, our result demonstrates that bond market shock spillover has increased dramatically during Covid-19 period across maturities compared to pre-Covid-19 period. In the context of the financial market, Yousfi et al ( 2021 ) and Elsayed et al ( 2022 ) demonstrated that the shocks spillover had reached the highest level during the pandemic compared to the pre-pandemic period.…”

“…It, of course, reveals the devasting consequences of Covid-19 on sovereign bond markets around the world. Several recent studies, for example, Gubareva and Umar ( 2020 ), Zaremba et al ( 2021 ), Yousfi et al ( 2021 ) and Elsayed et al ( 2022 ), strongly argue that the Covid-19 pandemic affected financial markets severely.…”