COVID‐19, asset markets and capital flows

Abstract

This paper empirically examines the reaction of global financial markets across 38 economies to the COVID‐19 outbreak, with special focus on the dynamics of capital flows across 14 emerging market economies. The effectiveness of fiscal and monetary policy responses to COVID‐19 is also tested. Using daily data over the period January 4, 2010 to August 31, 2020, and controlling for a host of domestic and global macroeconomic and financial factors, we use a fixed effects panel approach and a structural VAR framework to show that emerging markets have been more heavily affected than advanced economies. In particular, emerging economies in Asia and Europe have experienced the sharpest impacts on stock, bond and exchange rates due to COVID‐19, as well as abrupt and substantial capital outflows. Quantitative easing and fiscal stimulus packages mainly helped to boost stock prices, notably for advanced and emerging economies in Asia. Our findings also highlight the role that global factors and developments in the world's leading financial centers have on financial conditions in EMEs. Importantly, the impact of COVID‐19 related quantitative easing measures by central banks in advanced countries extended to EMEs, with significant positive spillovers to EME stock markets in Asia, Europe and Latin America. Going forward, while the ultimate resolution of COVID‐19 may be expected to lead to a market correction as uncertainty declines, our impulse response analysis suggests that there may be persistent effects on bond markets in emerging Europe and on EME capital flows.

Scaling up sustainable investment through blockchain‐based project bonds

“…Nevertheless, these are in part still highly dependent on foreign investors. The large‐scale withdrawal of international capital from emerging economies’ bond markets in March 2020 has once again highlighted the vulnerabilities associated with a shallow domestic investor base and heavy reliance on international portfolio investors (Beirne, Renzhi, Sugandi, & Volz, 2021; Beirne, Renzhi, & Volz, 2021; Hofmann et al, 2020). There is clearly a need to develop local‐currency capital markets further with a strong domestic investor base.…”

Impact of government interventions on the stock market during COVID-19: a case study in Indonesia

“…Besides, monetary policies and fiscal policies were impactful in helping stock markets to rebound in all continents. Asian emerging markets were found to have a spillover impact from developed countries’ quantitative easing policies, contributing to an 8% surge on average (Beirne et al 2021 ).…”

Financial markets' responses to COVID-19: A comparative analysis

“…However, recent evidence regarding the “hot money” phenomenon is mixed, with some studies (e.g., Liao and McDowell, 2021 ) finding that crises precipitate capital flight from developing countries while others (e.g., Forbes and Warnock, 2021 ) provide evidence suggesting that extreme capital flow movements did not increase during the early part of the covid-19 crisis. Given this conflicting evidence and the fact that some studies indicate that capital flows were an important channel of transmission of effects of the covid-19 crisis on capital markets (e.g., Beirne et al, 2021 ), it is interesting to ascertain whether covid-19 (infections and deaths) and its attendant management (lockdowns and restrictions) had symmetric effects in developing markets and developed markets. This study seeks answers to this question using stock returns and bond yields of emerging and developed markets.…”