Unveiling COVID-19’s impact on Financial Stability: A Comprehensive Study of Price Dynamics and Investor Behavior in G7 Markets

Abstract

The paper delves into the impact of the COVID-19 pandemic on foreign stock markets across several developed nations. It seeks to empirically validate the presence of contagion by employing an adjusted correlation test spanning 7 developing stock markets from February 1, 1992, to April 31, 2021. Employing the FIEGARCH (1.1), DCC-MGARCH(1,1), and Switching-Markov analysis models, the research uncovers compelling evidence of the pandemic's influence on most developed countries during the COVID-19 period. Notably, these markets appear significantly susceptible to the adverse effects brought about by the pandemic. Recognizing the substantial ramifications of financial downturns on monetary policy, risk assessment, asset valuation, and portfolio distribution, the findings hold paramount significance for policymakers, investors, and portfolio managers. This empirical investigation offers insights that could profoundly impact decision-making strategies in these domains, shedding light on crucial aspects for informed policy adjustments, investment decisions, and portfolio allocations amidst such critical market fluctuations.

Resilience Amidst Turbulence: Unraveling COVID-19’s Impact on Financial Stability through Price Dynamics and Investor Behavior in GCC Markets

“…Engle's DCC-GARCH model estimation involves two main steps: initially, estimating the multivariate GARCH model, followed by estimating the time-varying conditional correlations. Described by Talbi et al (2024), the multivariate DCC-GARCH model is characterized as follows:…”

“…This statistical approach allows us to gauge whether there are significant differences in the correlation dynamics across these distinct time frames (Talbi et al, 2024). By comparing these coefficients, we aim to discern any notable shifts or alterations in the relationship between foreign Stock markets and Total Investment returns, offering insight into the influence of the pandemic on these interconnected financial metrics.…”

“…Additionally, the theoretical underpinnings of pandemic information searches as indicators of fear or uncertainty align closely with investor attention-based sentiment measures, potentially overlooking nuanced market dynamics (Da et al, 2015;Burggraf et al, 2021;Goel & Dash, 2021;Smales, 2021). Emphasizing the role of investor emotions, prior studies have shown their significant impact on market fluctuations and asset allocation strategies (Talbi et al, 2024;Al Guindy, 2021;Garcia, 2013;Sun et al, 2021;Tetlock, 2007;Wang et al, 2021). Talbi et al (2024) found COVID-19 contagion in foreign stock markets of developed nations.…”

“…Emphasizing the role of investor emotions, prior studies have shown their significant impact on market fluctuations and asset allocation strategies (Talbi et al, 2024;Al Guindy, 2021;Garcia, 2013;Sun et al, 2021;Tetlock, 2007;Wang et al, 2021). Talbi et al (2024) found COVID-19 contagion in foreign stock markets of developed nations. Their analysis from February 1, 1992, to April 31, 2021, revealed significant pandemic impacts, guiding decisions for policymakers, investors, and portfolio managers amidst market fluctuations.…”

“…To conduct our empirical analysis, we adopt the methodology introduced by Chiang et al (2007). Their examination of the Asian crisis employed a DCC-GARCH(1,1) model and encompassed tests focused on adjusted correlation coefficients (Talbi et al, 2024). ) Engle (2002) We employ Engle's DCC-MGARCH model (2002) to delve into the ramifications of the COVID-19 pandemic on both Total Investment Returns and Stock Market Returns.…”