Risk aversion connectedness in developed and emerging equity markets before and after the COVID-19 pandemic

Athanasios P Fassas

doi:10.1016/j.heliyon.2020.e05715

Risk aversion connectedness in developed and emerging equity markets before and after the COVID-19 pandemic

Heliyon. 2020 Dec 13;6(12):e05715. doi: 10.1016/j.heliyon.2020.e05715. eCollection 2020 Dec.

Author

Athanasios P Fassas¹

Affiliation

¹ Department of Accounting and Finance, University of Thessaly, Geopolis Campus, 41500, Larissa, Greece.

Abstract

This study investigates the dynamic connectedness across the variance risk premium in international developed and emerging equity markets based on a Bayesian time-varying parameter vector autoregressive methodology. The empirical results indicate that the total spillover index is on average 65.6%, indicating a high, albeit declining, level of interconnectedness across the investor sentiment in the three markets under review until early 2020. Following the COVID-19 outbreak though, the total investors' risk aversion connectedness - as expected - strengthens, but more importantly, its dynamics alter, indicating that the risk aversion of emerging markets is an important contributor to the connectedness of international markets.

Keywords: Behavioral economics; Covid; Diebold and Yilmaz; Econometrics; Emerging markets; Financial crisis; Financial market; International finance; Risk aversion; Spillovers; TVP-VAR; Variance risk premium.