How COVID-19 has affected stock market persistence? Evidence from the G7’s

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Highlights

  • This paper investigates the persistence of the G7’s stock market volatility.

  • We examine the sensitivity of volatility persistence to COVID-19 outbreak.

  • We employ the Fractionally Integrated GARCH model to measure persistence.

  • Our results show that the pre-pandemic period exhibits lower levels of persistence.

  • S&P 500 and FTSE/MIB were the most persistent indices in the COVID-19 period.

Abstract

This paper examines how COVID-19 pandemic has affected volatility persistence in the G7’s stock markets. Based on daily data we divided the whole sample into two sub-samples according to its breakpoints and found that they occurred right after the declaration of COVID-19 pandemic by the World Health Organization — WHO (2020). This approach allows us to assess the main differences between these two distinct phases. Thus, while the first sub-period is relatively calm, the second one, which coincides with the pandemic outbreak, shows higher levels of volatility. Considering this, we rely on GARCH-type models to assess the degree of persistence of volatility and to evaluate how it has evolved across sub-samples. Our results show that the FIGARCH(1,d,1) is the best model to describe the data and that the degree of persistence is very different from the first to the second sub-sample. Thus, while the pre-pandemic period exhibits lower levels of persistence it has greatly increased with the COVID-19 outbreak. In particular, S&P 500 and FTSE/MIB became the most persistent indices in contrast to NIKKEI 225 and FTSE 100, which were amongst the least persistent.

Keywords

COVID-19
Volatility
Persistence
Conditional variance
G7
FIGARCH

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