Financial contagion during COVID-19 crisis

Md Akhtaruzzaman; Sabri Boubaker; Ahmet Sensoy

doi:10.1016/j.frl.2020.101604

Financial contagion during COVID-19 crisis

Financ Res Lett. 2021 Jan:38:101604. doi: 10.1016/j.frl.2020.101604. Epub 2020 May 23.

Authors

Md Akhtaruzzaman^{1

2}, Sabri Boubaker^{3

4}, Ahmet Sensoy⁵

Affiliations

¹ Australian Catholic University, Sydney, Australia.
² Visiting Research Fellow, UCB Capital Management Ltd, Bangladesh.
³ EM Normandie Business School, Métis Lab, France.
⁴ International School, Vietnam National University, Hanoi, Vietnam.
⁵ Bilkent University, Faculty of Business Administration, Ankara, Turkey.

Abstract

This study examines how financial contagion occurs through financial and nonfinancial firms between China and G7 countries during the COVID-19 period. The empirical results show that listed firms across these countries, financial and non-financial firms alike, experience significant increase in conditional correlations between their stock returns. However, the magnitude of increase in these correlations is considerably higher for financial firms during the COVID-19 outbreak, indicating the importance of their role in financial contagion transmission. They also show that optimal hedge ratios increase significantly in most cases, implying higher hedging costs during the COVID-19 period.

Keywords: COVID–19; financial contagion; financial firms; hedge ratios; nonfinancial firms; spillover index.