Elsevier

Finance Research Letters

Volume 37, November 2020, 101775
Finance Research Letters

Stock market returns, volatility, correlation and liquidity during the COVID-19 crisis: Evidence from the Markov switching approach

https://doi.org/10.1016/j.frl.2020.101775Get rights and content
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open access

Highlights

  • It is the first work which focuses on three indicators of the financial market, namely volatility expectations, correlation expectations and illiquidity during the COVID-19 crisis.

  • We examine structural breaks in the stock market returns – implied volatility, stock market returns –implied correlation and stock market returns – market illiquidity relations.

  • We detect a structural break in the relationship between stock returns – correlation expectations preceding by one day the structural break in stock returns – volatility expectations.

  • Italy is recognized as the only one country transmitting fears from the data of COVID-19 cases to global fear gauges related to volatility and correlation.

  • Stock market illiquidity does not affect the stock market returns and does not depend on any COVID-19 official announcements of cases and deaths.

Abstract

This paper investigates the relationship between US stock market returns (S&P500) and three indicators of the market, namely implied volatility, implied correlation and liquidity. It also considers the short range dependence between both total confirmed cases and deaths in twelve countries and market movements. We use the two-regime Markov switching model to find the structural break between stock market returns and key stock market indicators. The findings show close dependence between returns and both implied volatility and implied correlation but not with liquidity. The findings indicate the unique role of Italy in crisis transmission.

Keywords

COVID-19
VIX
Implied correlation
Liquidity

JEL classification

G10
G14
C24
C58

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