The COVID-19 Black Swan Crisis: Reaction and Recovery of Various Financial Markets
54 Pages Posted: 27 May 2020
Date Written: May 27, 2020
This paper examines and compares financial market reaction and recovery of four broad classes of financial assets – equity indexes, precious metals, 10-year benchmark bonds and cryptocurrencies, to the COVID-19 pandemic. Using the Yang and Zhao (2020) quantile unit-root tests for return persistence, we find heterogeneity in reactions and recovery patterns not only across asset classes, but also within them. Specifically, we find strong potential for mean reversion in equity markets even at high levels of shocks. While gold offers limited mean reversion, platinum shows very strong resistance to the COVID-19. Government bonds show small declines in value to the COVID-19 in addition to high persistence. Cryptocurrencies, as a group, turn out to be the riskiest in the long-term, with more than a 50% decline in value coupled with high degrees of persistence. Our results raise questions as to the safe haven characteristics of the newly-popular Bitcoin. Our findings are useful for policy makers and investors through a better understanding of differences in the potential for mean reversion provided by different asset classes.
Keywords: COVID-19 reaction and recovery, quantile unit root test, cryptocurrencies, precious metals
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