Impact of Early COVID-19 Pandemic on the US and European Stock Markets and Volatility Forecasting
40 Pages Posted: 25 Oct 2020
Date Written: October 17, 2020
This study examines the impact of COVID-19 on US and European stock indexes, implied volatility (IV) indices, and proposes forecasting accuracy of IV indices form daily data of March 2005 to May 2020, having an out-of-sample assessment of COVID-19. The empirical findings of Canonical Correlation Analysis (CCA) contribute significant insight into COVID-19 over the US and European stock indexes. This result shows that the death and recovery cases of COVID-19 have a significant positive impact of VIX, VXD, and VXN; however, the S&P 500, DJIA, and NASDAQ 100 show a negative association. Again, we also observe the significant impact of COVID-19 in stock trading prices and volatility expectations. The evidence of the point forecasts is more reliable for European IV indices than the US IV indices. Finally, this study validates IV indices' informational efficiency in the financial markets and suggests investors about portfolio management and investment risk minimization for similar future pandemic situations.
Keywords: COVID-19, General linear model, Implied volatility, Forecasting accuracy
JEL Classification: G, M
Suggested Citation: Suggested Citation