Spillovers between positively and negatively affected service sectors from the COVID-19 health crisis: Implications for portfolio management

https://doi.org/10.1016/j.pacfin.2023.102009Get rights and content

Highlights

  • We examine the connectedness between four sectors in the wake of the pandemic.

  • Of these, travel and leisure was negatively affected by the pandemic.

  • However, healthcare, technology, and telecommunications were positively impacted.

  • Return and volatility spillovers increased during the pandemic in these sectors.

  • The sectors mentioned in Point 3 should be included in portfolios to reduce risk.

Abstract

This study empirically investigates and contributes new evidence to the ongoing topic of potential volatility spillover, efficient portfolio management, and hedging strategies. We investigate the connectedness between the travel and leisure sector (which was negatively affected by the COVID-19 pandemic) and healthcare, technology, and telecommunications sectors (which were positively impacted by the pandemic). We selected these four service sectors because they have been impacted by the pandemic and are also crucial for the world's economy. We separately perform a connectedness analysis for four regions: Europe, Eastern Europe, Asia-Pacific, and North America. The main findings indicate a rise in return and volatility spillovers during the COVID-19 outbreak in the selected sectors. Healthcare, telecommunications, and technology sectors are major transmitters of volatility shocks to the travel and leisure sector during the crisis. The portfolio analysis shows that investors should include healthcare, telecommunications, and technology sectors in their equity portfolios to reduce investment risk and protect expected returns during the pandemic. Hedge ratios vary over crisis and non-crisis periods, highlighting the option of adjusting hedging strategies during turbulent and stable periods. The study also evaluates efficient portfolio management strategies shaped during the COVID-19 pandemic using the estimated results of the DCC-GARCH approach.

Keywords

Return-risk spillovers
Time-varying correlations
Hedging
Portfolio diversification
COVID-19
Travel and leisure

JEL classifications

G01
G11
C32
C58

Abbreviations

FEVD
Forecast Error Variance Decomposition
GFC
Global Financial Crisis
GDP
Gross Domestic Product
HEI
Hedging Effectiveness Index
TSI
Total Spillover Index
T&L
Travel and Leisure
WTTC
World Travel & Tourism Council

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