Time–frequency return co-movement among asset classes around the COVID-19 outbreak: portfolio implications

Abstract

This study explores the time–frequency return connectedness of the four most relevant asset classes namely, equity, digital assets, commodity, and fixed income. To do so, we use the novel proxies of the S&P500 Index for equity, the S&P Cryptocurrency MegaCAP Index for digital assets, the S&P Goldman Sachs Commodity Index for commodity, and the S&P Global Developed Sovereign Bond Index for fixed income, and also employ the wavelet analysis for daily data over the period 2017: M02 to 2021: M09. In contrast to the pre-COVID-19 period, our findings indicate that the interdependence between the selected asset classes has intensified across all time scales and frequency bands during the COVID-19 crisis, proving the lack of hedging opportunities. Besides, the findings reveal that there is a significant lead-lag relationship between time series at medium and low frequencies during the research period, and the directional connectedness among asset classes is sensitive to frequencies. Especially, the co-movements among the pairs are pronounced during the COVID-19 outbreak. Remarkably, the wavelet-based Granger causality test corroborates the wavelet results and underscores there is a significant causal link between the variables during COVID compared to pre-COVID. Moreover, the results of the portfolio risk analysis by employing the value at risk (VaR) measure indicate that portfolio diversity advantages vary among frequency and across time. The results of the present study provide insight and might help foreign portfolio investors diversify their portfolios across different asset classes.

An impact assessment of the COVID-19 pandemic on Japanese and US hotel stocks

“…( 2022 ) examined the impact of the world pandemic uncertainty index on the German stock market index (DAX index) for the period from the first quarter of 1996 to the third quarter of 2020 by using Markov regime-switching and Fourier based approaches. Athari and Hung ( 2022 ) explored the time–frequency return connectedness of the four most relevant asset classes of equity, digital assets, commodity, and fixed income by employing the wavelet analysis for daily data over the period from February 2017 to September 2021. These studies, in particular, those using information on COVID-19 explicitly or implicitly, are quite meaningful for examining the impact of COVID-19 on stock and commodity markets comprehensively, but they do not provide a specific analysis of the travel and tourism industry, particularly the hotel industry, which we aim to examine.…”

“… 2021 ; Kanamura 2021 ; Athari et al. 2022 ; Athari and Hung 2022 ). These studies, in particular those using COVID-19 information explicitly or implicitly, provide meaningful and comprehensive examinations of the impact of COVID-19 on stock and commodity markets, but they do not provide a specific analysis of the travel and tourism industry, particularly the hotel industry, which is our aim.…”

Stock profiling using time–frequency-varying systematic risk measure

“…Several studies have focused on its use in finance to model interdependencies and relationships between commodities, stock indexes, and other financial assets such as cryptocurrencies (Rua and Nunes 2012 ; Vacha and Barunik 2013 ; Aguiar-Conraria and Soares 2014 ; Bekiros and Marcellino 2014 ; Bekiros et al 2016 ; Kahraman and Unal 2019 ). Recently, partial continuous wavelet approaches have been developed to examine better relationships between various financial asset classes, such as equities or cryptocurrencies (Athari and Hung 2022 ), Islamic equities (Al-Yahyaee et al 2020 ), or metals and energy future prices (Michis 2022 ). These studies discover that investment horizons (frequencies) influence risk’s diffusion.…”

At the Frontier of Sustainable Finance: Impact Investing and the Financial Tradeoff; Evidence from Private Portfolio Companies in the United Kingdom

“…If the Coronavirus pandemic has put pressure on companies to step up their social and environmental commitment, it has also put the spotlight back on the all-time relevant issue in the field of portfolio investing: diversification [16]. Interdependence between asset classes has in fact intensified during the COVID-19 pandemic, pushing investors and portfolio managers to look for alternative sources of hedging and to explore opportunities within commodity and digital assets markets.…”