The role of the COVID-19 pandemic in US market volatility: Evidence from the VIX index

Nicholas Apergis; Ghulam Mustafa; Shafaq Malik

doi:10.1016/j.qref.2023.03.004

The role of the COVID-19 pandemic in US market volatility: Evidence from the VIX index

Q Rev Econ Finance. 2023 Jun:89:27-35. doi: 10.1016/j.qref.2023.03.004. Epub 2023 Mar 5.

Authors

Nicholas Apergis¹, Ghulam Mustafa², Shafaq Malik³

Affiliations

¹ Department of Banking and Financial Management, University of Piraeus, Greece.
² Discipline of Accounting, Economics, and Finance, Derby Business School, University of Derby, Kedleston Rd, Derby DE22 1GB, United Kingdom.
³ Department of Economics, Finance & Entrepreneurship, Aston Business School, Aston University, Birmingham B4 7ET United Kingdom.

Abstract

We examine how the implied volatility in the US financial market has been affected by the COVID-19 pandemic. We decompose the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) into two implied volatility conditions (i.e., low and high), and COVID-19 pandemic cases and deaths into two categories (i.e., low and high). Our novel quantile-on-quantile regression approach allows us to better examine the dynamic relationship between the COVID-19 pandemic and implied volatility. Our empirical results show that increased death rates tend to increase fear in the US financial market. Specifically. we find that high COVID-19 cases have a significant impact on implied volatility under high uncertainty conditions, but low COVID-19 cases appear to have no impact on implied volatility in the US market. Our findings offer support to the US policy response by the Federal Reserve Board and the government to limit the instability effect of the COVID-19 shock on the financial markets.

Keywords: COVID-19; Forecasting; Quantile-on-quantile regression; VIX.