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

See all articles by Ghulame Rubbaniy

Ghulame Rubbaniy

Zayed University - College of Business

Ali Awais Khalid

University of Lahore (UOL) - Lahore Business School

Abiot Mindaye Tessema

Zayed University - College of Business

Date Written: May 11, 2021

Abstract

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

Rubbaniy, Ghulame and Khalid, Ali Awais and Tessema, Abiot, Do Stock Market Fear and Economic Policy Uncertainty Co-Move with COVID-19 Fear? Evidence from the US and UK (May 11, 2021). Available at SSRN: https://ssrn.com/abstract=3843666 or http://dx.doi.org/10.2139/ssrn.3843666

Ghulame Rubbaniy (Contact Author)

Zayed University - College of Business ( email )

Zayed University
P.O. Box 144534
Abu Dhabi
United Arab Emirates

Ali Awais Khalid

University of Lahore (UOL) - Lahore Business School ( email )

1-KM Bopatian Chowk, Defence Road
Lahore, Punjab 54000
Pakistan

Abiot Tessema

Zayed University - College of Business ( email )

Zayed University
P.O. Box 144534
Abu Dhabi
United Arab Emirates

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