What causes US equity market sector volatilities during the coronavirus pandemic?

ABSTRACT

This paper seeks to identify key variables contributing to sectoral stock market volatilities in the US under the enduring pressure of the COVID-19 pandemic, using a broad array of candidate factors. We adopt a Beta-Skew-t-EGARCH model to capture the time-varying dynamics of the individual sectoral return volatilities. The empirical analysis is performed via an elastic-net regularized regression model. We find that trading volume, volatility of broad US dollar exchange rates, coronavirus infection rates, VIX, Google search trends, US economic policy uncertainty, and the initiation of vaccination programmes are the most common determinants of sectoral volatility.

KEYWORDS:

• US equity sector indices
• volatility determinants
• COVID-19 pandemic
• elastic net method

JEL CLASSIFICATION:

• C53
• F36
• G10
• G14

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Due to space constraints, we have not offered a detailed conceptual reasoning for how the candidate independent variables could affect sectoral volatility. This aspect remains a potential area for more comprehensive exploration in future research endeavours.

² For space considerations, we have not included the technical details of the Beta-Skew-t-EGARCH model here. Interested readers are encouraged to refer to the papers cited above for a more in-depth understanding.