Impact of COVID-19 on Financial Returns: A Spatial Dynamic Panel Data Model with Random Effects

Abstract

Using data for most of the year 2020, we analysed the impact of COVID-19 deaths on a given country regarding the financial market returns of neighbouring countries. Our empirical evidence show that in the first weeks of the COVID-19 outbreak, until mid-March 2020, the spatial effect of COVID-19 deaths was statistically significant, leading to a contraction in returns and an increase in risk. Moreover, the effects disappeared in the remaining months as financial market moved back to pre-crisis levels, causing a decrease in the overall risk. Our evidence supports a behavioural impact of the pandemic on financial markets.

Keywords: COVID-19, Financial crisis, Spatio-temporal modeling

JEL Classification: C23, C33, G01, G15, C58