Stock market comovements: Evidence from the COVID-19 pandemic

Abstract

The COVID-19 pandemic shock has harmed the US and East Asian stock markets. Focusing on measuring the inherent correlation, this paper employs a GARCH-Copula CoVaR approach to address the debate on the extreme risk spillovers from the US to China, Japan, Hong Kong, and South Korea stock returns. The results show a large spillover effect from the US to East Asian stock markets. Compared to the tranquil period, these spillovers become stronger in the COVID-19 period. The findings show that indirect spillovers on the Chinese stock market are heavier than direct spillovers, and impacts deluge only via Hong Kong. The study contrasts spillover’ features of the US COVID-19 shock and the Chinese 2015 crisis. These findings provide useful support for policymakers and risk managers involved in the East Asian stock markets.

Volatility spillovers from the Chinese stock market to the U.S. stock market: The role of the COVID-19 pandemic

“…In the integration context, volatility spillovers and interdependence between global equity markets are unavoidable ( Arfaoui et al, 2022 ; Maghyereh et al, 2022 ; Zehri, 2021 ; Zorgati & Garfatta, 2021 ). Volatility contagion is universally observed among affiliate stock markets, such as European stock markets ( Kanas, 1998 ); East Asian stock markets ( Yilmaz, 2010 ); Asian stock markets ( Joshi, 2011 ); North American, European, and Asian stock markets ( Singh et al, 2010 ); or even volatility transmission from stock markets in East Asia to stock markets in Southeast markets ( Wu, 2020 ).…”

“…That suggests that global integration facilitates volatility spillovers. Spillover effects acquired from the U.S. stock market have been widely indicated in European stock markets ( Baele, 2002 ); Islamic stock markets ( Majdoub & Mansour, 2014 ); BRICS stock markets ( Mensi et al, 2014 , 2016 ; Sui & Sun, 2016 ); ASEAN-6 stock markets ( Vo & Tran, 2020 ); and the East Asian stock markets ( Zehri, 2021 ). Numerous pieces of evidence demonstrate that the volatility of stock markets in the U.S. and Asia during the two crises are intrinsically linked.…”

“… Vo and Tran (2020) explored that during the financial crisis, the volatility shocks of the U.S. stock market caused notable volatility shocks in Southeast Asian equity markets. Zehri (2021) demonstrated volatility spillovers from the stock markets in the U.S. to East Asia became more enormous during COVID-19.…”

“…Globalization has caused capital market interdependence to increase ( Baele, 2005 ; Chevallier et al, 2018 ). Many studies have shown that the rise in financial integration has led to stock market return transmission and volatility spillovers ( BenSaïda et al, 2018 ; Maghyereh et al, 2022 ; Zehri, 2021 ; Zorgati & Garfatta, 2021 ). Vo and Tran (2020) illustrate that volatility spillovers between stock markets are typically associated with the variation in stock returns and investment risks in equity markets.…”

Direct and spillover portfolio effects of COVID-19

“…According to the World Health Organization (short for WHO), over 100 million cases had been confirmed globally and over 2 million deaths had been reported as of 2 February 2021. The pandemic brought uncertainties and fears to the global economy (Altig et al, 2020) and caused wild swings in financial markets ( Al-Awadhi et al, 2020 , Baker et al, 2020 , Bai et al, 2020 ; He et al, 2020; Toda, 2020 ; Topcu and Gulal, 2020 ; Zehri, 2021 ). As one of the most sensitive indicators in the financial market, cross-border capital flows had shown significant fluctuations.…”