Impact of COVID-19 pandemic disease outbreak on the global equity markets

Abstract

Behavioural finance literature explains that investment decisions are subject to ‘investor sentiment’ and, consequently, may affect the pricing of various asset classes. Our study examines the 12 major equity markets amid the COVID-19 pandemic disease outbreak in relation to returns and volatility behaviour. Empirical results show that the number of new cases and deaths recorded daily because of COVID-19 has disrupted investors’ sentiments globally, and also, the market has experienced an unparalleled negative return. Market connectedness and volatility spillover deliberate on the increased risk of emergent pandemic crises, which has become more pronounced during the first quarter of 2020. Further, after the global financial crisis, the volatility index has appeared at its highest level for the very first time. The unprecedented rise in the volatility index level indicates more significant pressure on put options as a hedge against the pandemic uncertainty.

Keywords:

• COVID-19
• pandemic
• equity market
• implied volatility
• VIX

JEL Classification:

• G10
• G14
• G15
• C22

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Refer to ‘White Paper Cboe Volatility Index’ for more details. (https://www.cboe.com/micro/vix/vixwhite.pdf).

2 For example, Ichev and Marinč (2018) studied the effects of tail event Ebola Outbreak on the firm’s stocks located in West Africa and in the United States for the estimation window 2014–2016.

3 Refer to ‘COVID-19 outbreak data’ at https://www.ecdc.europa.eu/en/publications-data/download-todays-data-geographic-distribution-covid-19-cases-worldwide.