Rethinking Financial Contagion: Information Transmission Mechanism During the COVID-19 Pandemic

Rapidly growing numbers of empirical papers assessing the financial effects of COVID-19 pandemic triggered an urgent need for a study summarising the existing knowledge of contagion phenomenon. This paper provides a review of conceptual approaches to studying financial contagion at four levels of information transmission: (i) Catalyst of contagion;(ii) Media Attention;(iii) Spillover effect at financial markets;(iv) Macroeconomic fundamentals. We discuss the unique characteristics of COVID-19 crisis and demonstrate how this shock differs from previous crises and to what extent the COVID-19 pandemic can be considered a ‘black swan’ event. We also review the main concepts, definitions and methodologies that are frequently, but inconsistently, used in contagion literature to unveil the existing problems and ambiguities in this popular area of research. This paper will help researchers to conduct coherent and methodologically rigorous research on the impact of COVID-19 on financial markets during the pandemic and its aftermath.

Has the risk of socially responsible investments (SRI) companies stocks changed in the COVID-19 period? International evidence.

In this study, we investigate changes in risk of socially responsible investments (SRI) companies in the periods before and during the COVID-19 pandemic relying on a broad dataset covering SRI indices from 35 markets analyzed between 2016 and 2021. Our results provide evidence that the systematic risk of the SRI firms, measured by the beta coefficient, increased in most countries around the world during the COVID-19 period. However, some markets in our sample show remarkable resilience and stability in terms of the changes in their risk patterns. In particular, the systematic risk of SRI companies from the markets in East Asia decreased during the COVID-19 pandemic, which contrasts with substantial increases in the systematic risk of the SRI firms from the SRI indices in all other regions around the world.

Do Business Models Matter? Evidence from the SRI Companies Performance and the COVID-19 Pandemic

Business models of companies are rarely analysed in the context of their financial performance, so little is known about how much they should actually matter in the decision-making processes of investors. In this study, we examine the performance of the SRI stocks portfolios in the US market, which are divided into four main business models types. Our results evidence that Brokers business model clearly outperformed the market in the whole period from February 2016 to January 2021. However, when the entire sample is divided into the pre-COVID-19 sub-sample and COVID-19 sub-sample, the outperformance and underperformance effects among the SRI firms disappeared during the COVID-19 pandemic period. JEL codes : I1, I11, G1, G11, G15, Q56

The impact and role of COVID-19 uncertainty: A global industry analysis

The novel 2019 coronavirus (COVID-19) has resulted in uncertainty that permeates every aspect of life and business. In this study we undertake a comprehensive analysis of the impact of COVID-19 related uncertainty on global industry returns and volatility using a sample of 68 global industries and Google Trends search data to measure COVID-19 related uncertainty. The results indicate that COVID-19 related uncertainty negatively impacts returns on all industries and generally leads to higher volatility. We interpret these findings as uncertainty related to the future financial performance of firms and emerging opportunities for some industries. Certain industries are more resilient than others and increased uncertainty is not only necessarily associated with industries that experienced the largest negative returns. We also find that new factors emerged in the return generating process during the COVID-19 period. We show that despite an uncertain climate, some industries performed well, yielding positive cumulative abnormal returns that at times are greater than during the pre-COVID-19 period. The implications of our findings for investors are discussed.

Systemic Risk Measures and Regulatory Challenges

This paper discusses different definitions of systemic risk and identifies the challenges regulators face in addressing this phenomenon. We conducted a systematic literature review of 4,859 s to categorise the various methodologies developed to measure systemic risk. In total, 60 systemic risk measures proposed post-2000 have been critically appraised to inform academics and regulators of their practical applications and model vulnerabilities. This review suggests that most of these methods focus on individual financial institutions rather than system stability. Those methodologies directly reflect the current regulations, which aim to ensure individual institutions’ soundness. As macro-prudential regulation evolves, policy-makers face the issues of understanding contagion and how regulations should be implemented. This paper also discusses new systemic risk and regulatory challenges resulting from the current COVID-19 pandemic.

The impact and role of COVID-19 uncertainty: A global industry analysis.

The novel 2019 coronavirus (COVID-19) has resulted in uncertainty that permeates every aspect of life and business. In this study we undertake a comprehensive analysis of the impact of COVID-19 related uncertainty on global industry returns and volatility using a sample of 68 global industries and Google Trends search data to measure COVID-19 related uncertainty. The results indicate that COVID-19 related uncertainty negatively impacts returns on all industries and generally leads to higher volatility. We interpret these findings as uncertainty related to the future financial performance of firms and emerging opportunities for some industries. Certain industries are more resilient than others and increased uncertainty is not only necessarily associated with industries that experienced the largest negative returns. We also find that new factors emerged in the return generating process during the COVID-19 period. We show that despite an uncertain climate, some industries performed well, yielding positive cumulative abnormal returns that at times are greater than during the pre-COVID-19 period. The implications of our findings for investors are discussed.

The COVID-19 storm and the energy sector: The impact and role of uncertainty.

Prior research has shown that energy sector stock prices are impacted by uncertainty. The coronavirus (COVID-19) pandemic has given rise to widespread health and economic-related uncertainty. In this study, we investigate the magnitude and the timing of the impact of COVID-19 related uncertainty on returns and volatility for 20 national energy indices and a global energy index using ARCH/GARCH models. We propose a novel "overall impact of uncertainty" (OIU) measure, explained using a natural phenomenon analogy of the overall impact of a rainstorm, to gauge the magnitude and intensity of the impact of uncertainty on energy sector returns. Drawing upon economic psychology, COVID-19 related uncertainty is measured in terms of searches for information relating to COVID-19 as captured by Google search trends. Our results show that the energy sectors of countries further west from the outbreak of the virus in China are impacted to a greater extent by COVID-19 related uncertainty. A similar observation is made for net energy and oil exporters relative to importers. We also find that the impact of uncertainty on most national energy sectors intensified and then weakened as the pandemic evolved. Additional analysis confirms that COVID-19 uncertainty is part of the composite set of factors that drive energy sector returns over the COVID-19 period although its importance has declined over time.

The only certainty is uncertainty: An analysis of the impact of COVID-19 uncertainty on regional stock markets.

Uncertainty surrounding COVID-19 is widespread. We investigate the timing and quantify the impact of COVID-19 related uncertainty on returns and volatility for regional market aggregates using ARCH/GARCH models. Drawing upon economic psychology, COVID-19 related uncertainty is measured by searches for information as reflected by Google search trends. Asian markets are more resilient than others. Latin American markets are most impacted in terms of returns and volatility. For most regions, there is evidence of an increasing impact of COVID-19 related uncertainty which dissipates as the crisis evolves. We confirm that Google search trends capture uncertainty by comparing this measure against alternative uncertainty measures.