Volatility impacts on the European banking sector: GFC and COVID-19

Abstract

This paper analyses the volatility transmission between European Global Systematically Important Banks (GSIBs) and implied stock market volatility. A Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity model is applied to determine the dynamic correlation between returns of Europe’s GSIBs and the world’s most prominent measure of market “fear”, the CBOE Volatility Index (VIX). The results identify a higher negative co-relationship between the VIX and GSIB returns during the COVID-19 period compared with the Global Financial Crisis (GFC), with one-day lagged changes in the VIX negatively Granger-causing bank returns. The asymmetric impact of changes in implied volatility is examined by quantile regressions, with the findings showing that in the lower quartile–where extreme negative bank returns are present–jumps in the VIX are highly significant. This effect is more pronounced during COVID-19 than during the GFC. Additional robustness analysis shows that these findings are consistent during the periods of the Swine Flu and Zika virus epidemics.

COVID-19 pandemic and liquidity commonality

“…A recent study conducted by Batten et al (2022) indicates that the negative effect of COVID-19 on the financial market is more substantial than in the GFC period. During the recent economic slowdown and the rise in global corporate defaults in 2020, the widespread increase in stock illiquidity is expected to dampen the overall stock market liquidity.…”

Market reaction to the Russian Ukrainian war: a global analysis of the banking industry

“…Unfortunately, they cannot be applied to international banking institutions because of their unique intermediation model [6] and central role in some sanctions. Indeed what distinguishes banks from nonfinancial firms is the spillover effect on global financial and commodity markets (Batten et al , 2022; Choudhury et al , 2022; Hassan et al , 2022b; Hassan et al , 2022c; Karim et al , 2022), as commercial banks play a facilitation role in transactions and providing credit in the modern economy. Under such high uncertainty and the nature of the war crisis, the banking system’s ability to withstand the economic repercussions of systemic risk-induced adverse events is even more critical.…”

The Dynamic Volatility Connectedness of Major Environmental, Social, and Governance (ESG) Stock Indices: Evidence Based on DCC-GARCH Model

“…Further research can be conducted in understanding the connectedness of the individual countries within the specific regions and highlight the major individual contributors for the volatility transmissions. Also, we can extend the research by applying advanced methodologies putforth by Batten et al ( 2022 ), Bhatia et al ( 2018 ), Antonakakis et al ( 2020 ), Chatziantoniou et al ( 2022 ) for more robustness of the findings.…”