Journal
INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS
Volume 73, Issue -, Pages -Publisher
ELSEVIER SCIENCE INC
DOI: 10.1016/j.irfa.2020.101646
Keywords
COVID-19 outbreak; Financial markets contagion; Return connectedness; TVP-VAR
Categories
Funding
- BMK, Lebanon
- BMDW, Lebanon
- Province of Upper Austria
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This study reveals that the structure and patterns of return connectedness across different assets underwent significant changes during the COVID-19 outbreak, with equities and USD indices acting as primary transmitters of shocks before the outbreak, and the bond index taking over during the outbreak. Additionally, the study finds a positive relationship between the index of uncertainty in financial markets due to infectious diseases and connectedness, which increases at higher levels of connectedness.
In this paper, we show evidence of a dramatic change in the structure and time-varying patterns of return connectedness across various assets (gold, crude oil, world equities, currencies, and bonds) around the COVID-19 outbreak. Using the TVP-VAR connectedness approach, the results show that the dynamic total connectedness across the five assets was moderate and quite stable until early 2020. After that, the total connectedness spikes and the structure of the network of connectedness alters, which concurs with the COVID-19 outbreak. The equity and USD indices are the primary transmitters of shocks before the outbreak, whereas the bond index becomes the main transmitters of shocks during the COVID-19 outbreak. However, the USD index is a net receiver of shocks to other assets during the outbreak period. Furthermore, using a recently developed newspaper-based index of uncertainty in financial markets due to infectious diseases to capture the recent impact of COVID-19, we find that connectedness is positively related to this index, and increases at higher levels (conditional quantiles) of connectedness. Overall, our results reflect the speedy disturbing effects of the COVID-19 outbreak, which matters to the formulations of policies seeking to achieve financial stability. The results also indicate a possibility to threaten investors' portfolios and fade the benefits of diversification.
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