Infectious disease pandemic and permanent volatility of international stock markets: A long-term perspective

Lan Bai; Yu Wei; Guiwu Wei; Xiafei Li; Songyun Zhang

doi:10.1016/j.frl.2020.101709

Infectious disease pandemic and permanent volatility of international stock markets: A long-term perspective

Financ Res Lett. 2021 May:40:101709. doi: 10.1016/j.frl.2020.101709. Epub 2020 Jul 30.

Authors

Lan Bai¹, Yu Wei¹, Guiwu Wei², Xiafei Li³, Songyun Zhang⁴

Affiliations

¹ School of Finance, Yunnan University of Finance and Economics, Kunming, China.
² School of Business, Sichuan Normal University, Chengdu, China.
³ School of Economics and Management, Southwest Jiaotong University, Chengdu, China.
⁴ College of Arts and Sciences, Case Western Reserve University, Cleveland, U.S.A.

Abstract

Understanding the impact of infectious disease pandemic on stock market volatility is of great concerns for investors and policy makers, especially during recent new coronavirus spreading period. Using an extended GARCH-MIDAS model and a newly developed Infectious Disease Equity Market Volatility Tracker (EMV-ID), we investigate the effects of infectious disease pandemic on volatility of US, China, UK and Japan stock markets through January 2005 to April 2020. The empirical results show that, up to 24-month lag, infectious disease pandemic has significant positive impacts on the permanent volatility of international stock markets, even after controlling the influences of past realized volatility, global economic policy uncertainty and the volatility leverage effect. At different lags of eruptions in infectious disease pandemic, EMV-ID has distinct effects on various stock markets while it has the smallest impact on permanent volatility of China's stock market.

Keywords: COVID-19; Garch-midas; Infectious disease pandemic; Stock market volatility.