Dynamic Co-movement and Spillover Among Global Financial Markets During COVID-19: Evidence From Wavelet Coherence Analysis

17 Pages Posted: 27 Dec 2022

See all articles by Limiao Bai

Limiao Bai

Universidade Federal de Minas Gerais

Virgilio Gaggiato

Federal University of Minas Gerais (UFMG)

Antonio Peres

Minas Gerais Federal University (UFMG)

Luiz F. F. Felix

APG Asset Management

Date Written: December 15, 2022

Abstract

We investigate how the Covid-19 pandemic impacted co-movements and lead-lag relationships among global financial markets. Large unexpected events, such as the September 11th terrorist attack, generally transmit transient shocks to financial markets capable of changing the direction of their causal relationships. The outbreak of Covid-19 pandemic was one of such exogenous shock, though with a long-lasting effect, as it propagated waves of turbulence across financial markets and generated time-varying risk contagion among different assets and geographies. Wavelet coherence analysis provides us an excellent tool to identify these dynamics, i.e., spillovers and risk contagion. Our empirical analysis utilizing daily data from January/2018 to November/2021 reveals that co-movements between U.S. stocks and other major markets have increased substantially around March/2020 relative to the pre-Covid time. U.S. lead-lag relationship with other equity markets have also changed dramatically post-Covid, especially relative to the Chinese market. Change in the lead-leg dynamics were also observed across equity, USD, oil, gold and Bitcoin markets. For instance, our results indicates that gold was still a better asset to hedge equity risk than Bitcoin, contrary to the hypothesized by recent studies. Our findings contribute to the domain of portfolio optimization and the risk management at different horizon bands.

Keywords: Wavelet coherence, financial market, co-movement

JEL Classification: F30, G15, G17

Suggested Citation

Bai, Limiao and Gaggiato, Virgilio and Peres, Antonio and Felix, Luiz F. F., Dynamic Co-movement and Spillover Among Global Financial Markets During COVID-19: Evidence From Wavelet Coherence Analysis (December 15, 2022). Available at SSRN: https://ssrn.com/abstract=4304045 or http://dx.doi.org/10.2139/ssrn.4304045

Limiao Bai (Contact Author)

Universidade Federal de Minas Gerais ( email )

Av. Antonio Carlos, 6627
Belo Horizonte, Minas Gerais 31270-901
Brazil

Virgilio Gaggiato

Federal University of Minas Gerais (UFMG) ( email )

Av. Antonio Carlos, 6627
Belo Horizonte, Minas Gerais 31270-901
Brazil

Antonio Peres

Minas Gerais Federal University (UFMG) ( email )

Luiz F. F. Felix

APG Asset Management ( email )

Gustav Mahlerplein 3
Amsterdam, 1082 MS
Netherlands

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