Stock market returns, volatility, correlation and liquidity during the COVID-19 crisis: Evidence from the Markov switching approach

Małgorzata Just; Krzysztof Echaust

doi:10.1016/j.frl.2020.101775

Stock market returns, volatility, correlation and liquidity during the COVID-19 crisis: Evidence from the Markov switching approach

Financ Res Lett. 2020 Nov:37:101775. doi: 10.1016/j.frl.2020.101775. Epub 2020 Sep 28.

Authors

Małgorzata Just¹, Krzysztof Echaust²

Affiliations

¹ Department of Finance and Accounting, Poznań University of Life Sciences, Wojska Polskiego 28, 60-637 Poznań, Poland.
² Department of Operations Research, Poznań University of Economics and Business, Al. Niepodległości 10, 61-875 Poznań, Poland.

Abstract

This paper investigates the relationship between US stock market returns (S&P500) and three indicators of the market, namely implied volatility, implied correlation and liquidity. It also considers the short range dependence between both total confirmed cases and deaths in twelve countries and market movements. We use the two-regime Markov switching model to find the structural break between stock market returns and key stock market indicators. The findings show close dependence between returns and both implied volatility and implied correlation but not with liquidity. The findings indicate the unique role of Italy in crisis transmission.

Keywords: COVID-19; Implied correlation; Liquidity; VIX.