The Effects of the COVID-19 Pandemic on Stock Markets, CDS and Economic Activity: Time-Varying Evidence from the US and Europe

44 Pages Posted: 4 Oct 2021

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Abdurrahman Nazif Catik

affiliation not provided to SSRN; Ege University Department of Economics

Mohamad Husam Helmi

Durham University Business School

Coskun Akdeniz

Tekirdağ Namık Kemal University; Ege University - Department of Economics

Ali Ilhan

Tekirdağ Namık Kemal University

Date Written: 2021

Abstract

This paper examines the effects of the COVID-19 pandemic on stock returns, CDS and economic activity in the US and the five European countries (the UK, Germany, France, Italy, and Spain) which have been most affected. The sample period covers the dates from the first confirmed COVID-19 cases in these countries to February 19, 2021. Specifically, we estimate first benchmark linear VAR models and then, given the evidence of parameter instability, TVP-VAR models with stochastic volatility which are ideally suited to capturing the changing dynamics in both financial markets and the real economy. The empirical findings can be summarised as follows. The linear VAR responses of electricity consumption (a proxy for real economic activity) to a one-standard-deviation shock to the number of COVID-19 cases are statistically insignificant, except for France, whilst the CDS ones are positive and significant only in a few periods, and there are very mixed results for those of stock returns. As for the TVP-VAR results, these indicate that COVID-19 cases had a negative and significant effect on economic activity in all countries in the early stages of the pandemic (especially in Italy), and a positive one on CDS at the same time (with cross-country differences). Finally, the negative impact on stock markets was felt only initially and it had tapered off by mid-April 2020.

Keywords: Covid-19, stock markets, CDS, economic activity, TVP-VAR

JEL Classification: G10, G140, G150

Suggested Citation

Caporale, Guglielmo Maria and Catik, Abdurrahman Nazif and Catik, Abdurrahman Nazif and Helmi, Mohamad Husam and Akdeniz, Coskun and Akdeniz, Coskun and Ilhan, Ali, The Effects of the COVID-19 Pandemic on Stock Markets, CDS and Economic Activity: Time-Varying Evidence from the US and Europe (2021). CESifo Working Paper No. 9316, Available at SSRN: https://ssrn.com/abstract=3932024 or http://dx.doi.org/10.2139/ssrn.3932024

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
Marie Jahoda Building
Uxbridge, Middlesex UB8 3PH
United Kingdom
+44 1895 266713 (Phone)
+44 1895 269770 (Fax)

HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Abdurrahman Nazif Catik

affiliation not provided to SSRN

No Address Available

Ege University Department of Economics ( email )

Bornova, Izmir 35100
Turkey

HOME PAGE: http://akademik.ege.edu.tr/?q=en/bilgiler&id=3270

Mohamad Husam Helmi

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Coskun Akdeniz

Ege University - Department of Economics ( email )

Bornova, Izmir 35040
Turkey

Tekirdağ Namık Kemal University ( email )

Ali Ilhan

Tekirdağ Namık Kemal University ( email )

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