Journal
FINANCE RESEARCH LETTERS
Volume 42, Issue -, Pages -Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.frl.2021.102091
Keywords
COVID-19; Equity returns; Markov switching; Predictive density; Investment strategies
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The study analyzed the overall situation of the US stock market during the pandemic, providing weekly forecasts to improve risk management and investment decisions. An investment strategy that uses out-of-sample forecasts for market states significantly outperformed a buy and hold strategy during the pandemic.
The COVID-19 pandemic has caused severe disruption worldwide. We analyze the aggregate U.S. stock market during this period, including implications for both short and long-horizon investors. We identify bull and bear market regimes including their bull correction and bear rally compo-nents, demonstrate our model's performance in capturing periods of significant regime change, and provide weekly forecasts that improve risk management and investment decisions. An in-vestment strategy that uses out-of-sample forecasts for market states outperforms a buy and hold strategy during the pandemic by a wide margin, both in terms of annualized returns and Sharpe ratios.
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