Do Stock Market Fear and Economic Policy Uncertainty Co-Move with COVID-19 Fear? Evidence from the US and UK
29 Pages Posted: 11 May 2021
Date Written: May 11, 2021
Using the daily data covering both the first and second wave of COVID-19 pandemic over the period from March 3, 2020, to February 12, 2021, this study documents a strong positive comovement between implied volatility indices and two proxies of the COVID-19 fear. However, in all the cases, the infectious disease equity market volatility index (IDEMVI), the COVID-19 proxy that is more representative of the stock market, exhibits a stronger positive comovement with volatility indices than the COVID-19 health-based fear index. We also find that the UK's implied volatility index weakly co-moves with the COVID-19 health-based fear index compared to the US. Our results show that EPU indices of both the US and UK exhibit a weak or no correlation with the COVID-19 health-based fear index. However, we find a significant positive co-movement between EPU indices and IDEMVI over the short-horizon and most of the sampling period with the leading effect of IDEMVI.
Keywords: COVID-19 health-based fear index, Infectious disease equity market volatility index, Implied volatility index, Economic policy uncertainty, Wavelet coherence
JEL Classification: G11, G15
Suggested Citation: Suggested Citation