Download This PaperA New Form of Financial Contagion: COVID-19 and Stock Market Responses
19 Pages Posted: 24 Apr 2020 Last revised: 2 Nov 2022
Date Written: April 20, 2020
Abstract
The COVID-19 pandemic has caused a different and more severe version of the contagion phenomenon. In this study, we examine the impact of the COVID-19 pandemic on six different stock markets: the US, the UK, Italy, Spain, China, and Turkey. Empirical analyses are conducted for four different time intervals to reveal the effect of the COVID-19 pandemic. The modified ICSS test shows that the pandemic has led to structural breaks in the volatility of stock indexes. While break dates intensify around February 19–21, 2020 in most markets, for the Chinese stock market the break appears approximately three weeks earlier, on January 30, 2020. According to the DCC-FIGARCH model, unlike other pairs, the co-movements of the Chinese and Turkish equity markets exhibit a rise of 20% due to the pandemic. Further investigation on this reaction shows that Baltic Dry Index, the value of the yuan and oil prices are significant variables for the relation of these two equity markets. This empirical finding justifies the strengthening of economic ties between China and Turkey. Recent projects such as Middle Corridor and Belt Road Initiative have shifted the relationship to a strategic partnership level. This finding should be considered by asset managers in portfolio diversification.
Keywords: Coronavirus, COVID-19 Pandemic, Global Stock Markets, DCC-MVGARCH, DCC-MVFIGARCH, Modified ICSS
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