COVID-19’s Impact on Financial Markets
Author: Shriraj D Mahajan
Financial markets have been impacted by the COVID-19 pandemic’s unparalleled global economic disruptions. The research study that looks at how COVID-19 affects financial indicators like stock markets, crude oil prices, Bitcoin, and the fear index is studied in this report. The study analyzes data from December 31, 2019, to May 1, 2020, using sophisticated econometric techniques like the Fourier Granger Causality Test, Fourier-SHIN Cointegration Test, and Fourier KPSS unit root test. Determining the pandemic’s immediate and long-term effects on financial markets is the goal of the study.
The Volatility of the Stock Market:
Extreme stock market volatility was one of the COVID-19 pandemic’s most immediate effects. Early in 2020, there were sharp drops in major stock indices like the S&P 500, Dow Jones Industrial Average, FTSE 100, and Nikkei 225. Panic selling brought on by the pandemic’s uncertainty destroyed trillions of dollars’ worth of market value. Important elements influencing the volatility of the stock market:
Investor Uncertainty: Risk aversion and sell-offs resulted from the uncertainty surrounding the pandemic’s duration and economic effects.
Corporate Profit Declines: Supply chain interruptions, business closures, and decreased consumer spending all have a negative impact on corporate profits, which in turn lowers stock values.
Government Interventions: After significant government stimulus plans and central bank interventions restored investor confidence, stock markets saw a partial recovery.
Methodology:
CELIK et al (2020) evaluates structural breaks in financial time series using the Fourier KPSS unit root test. While the Fourier Granger Causality Test looks at causality relationships, the Fourier-SHIN Cointegration Test finds long-term relationships between financial indicators. Among the financial metrics examined are:
· Stock markets: FTSE MIB (Italy), CAC 40 (France), FTSE 100 (UK), SHANGHAI Composite (China)
· Fear Index (VIX)
· Crude Oil (WTI)
· Bitcoin (BTC)
· Gold Ounce (OUNCE) The independent variables include the total verified number of COVID-19 cases (TVNC), total verified number of deaths (TVND), daily new cases (NDC), and daily new deaths (NDD).
Key Findings:
SATTAR et al (2020) presented that there is a significant negative relationship between COVID-19 confirmed cases and stock indices. The correlation analysis shows that COVID-19 has a significant impact on indices like the DJI, GSPC, NDX, NIKKEI 225, FTSE 100, DAX, and others.
· DJI (Dow Jones Industrial Average): Decreased by 23.20%
· GSPC (S&P 500): Decreased by 20.00%
· NDX (NASDAQ 100): Decreased by 10.53%
· NIKKEI 225: Decreased by 20.04%
· FTSE 100: Decreased by 24.80%
· DAX: Decreased by 26.73%
· SSE 50: Decreased by 12.20%
· HENG SENG: Decreased by 16.27%
· MOEX.ME: Decreased by 9.74%
· SENSEX: Decreased by 28.57%
The findings show that all countries’ COVID-19 confirmed cases have a significant impact on their respective stock indices with negative correlation. Notably, the SSE 50 index in China responded less adversely compared to other indices.
Effect of Covid-19 Outbreak on Market Conditions:
CELIK et al (2020) stated in there research that COVID-19 had a significant impact on financial markets. Key findings include:
1. Long-Term Effects: The study discovered that COVID-19 has a major long-term impact on the fear index, crude oil prices, and stock markets. Nevertheless, Bitcoin had no discernible long-term impact, indicating that, in contrast to traditional financial markets, cryptocurrency markets would be less susceptible to pandemic-related uncertainty.
2. Short-Term Effects: COVID-19 has short-term effects on Bitcoin, crude oil, stock markets, and the fear index. Market volatility was highlighted by sharp drops in the stock market indices, especially in March 2020.
3. Cointegration and Causality Analysis: The COVID-19 variables (NDC, NDD, TVNC, and TVND) were found to have a long-term correlation with crude oil prices, stock market indices, and the fear index by the Fourier-SHIN Cointegration Test. The idea that the pandemic had a major impact on investor behavior and market performance was supported by the Fourier Granger Causality Test, which showed causal correlations between daily COVID-19 cases and financial market indicator
Conclusion:
COVID-19 affected financial markets in both short-term and long-term ways. While Bitcoin showed long-term resilience, stock markets, crude oil, and the fear index were especially vulnerable to the pandemic. The study emphasizes how important it is for investors, financial institutions, and policymakers to take pandemic risks into account when making financial and economic decisions.
References:
Belén Nieto & Gonzalo Rubio (2022): The Effects of the COVID–19 Crisis on Risk Factors and Option-Implied Expected Market Risk Premia: An International Perspective
CELIK, Ismail & YILMAZ, Tayfun & EMIR, Suleyman & SAK, Ahmet Furkan (2020): The Effects Of Covid–19 Outbreak On Financial Markets
Dao Van Hung & Nguyen Thi Minh Hue & Vu Thuy Duong (2021): The Impact of COVID–19 on Stock Market Returns
Eachempati, Prajwal & Srivastava, Praveen Ranjan & Panigrahi, Prabin Kumar (2021): Sentiment Analysis of COVID–19 Pandemic on the Stock Market
Erdem, Orhan (2020): Freedom and stock market performance during Covid–19 outbreak
Ftiti, Zied & Ben Ameur, Hachmi & Louhichi, Waël (2021): Does non-fundamental news related to COVID–19 matter for stock returns? Evidence from Shanghai stock market
Hui Hong & Zhicun Bian & Chien-Chiang Lee (2021): COVID–19 and instability of stock market performance:
Ibrahim N. Khatatbeh & Mohammad Bani Hani & Mohammed N. Abu-Alfoul (2020):
Kucukcolak Recep Ali & Kucukcolak Necla Ilter & Tumbek Tekeoglu Askim Nurdan & Kucukoglu Sami (2024): The Effects of the COVID–19 Outbreak on the Global Retail Industry: An Event Study Approach
Moritz Johannes Herber & Matthias Scherf & Sabri Boubaker & Duc Khuong Nguyen (2022): The Effects of the COVID–19 Pandemic on the Stock Markets
SATTAR, Muhammad Atif & ARCILLA Jr., Felix E. & SATTAR, Muhammad Fahad (2020): The Response Of Financial Market Indices To Covid–19 Pandemic