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1.
Global Finance Journal ; JOUR:100641-100641, 54.
Article in English | EuropePMC | ID: covidwho-2092968

ABSTRACT

In this paper, we test the role of news in the predictability of return volatility of digital currency market during the COVID-19 pandemic. We use hourly data for cryptocurrencies and daily data for the news indicator, thus, the GARCH MIDAS framework which allows for mixed data frequencies is adopted. We validate the presupposition that fear-induced news triggered by the COVID-19 pandemic increases the return volatilities of the cryptocurrencies compared with the period before the pandemic. We also establish that the predictive model that incorporates the news effects forecasts the return volatility better than the benchmark (historical average)model.

2.
International Journal of Finance & Economics ; 27(4):4607-4618, 2022.
Article in English | ProQuest Central | ID: covidwho-2075011

ABSTRACT

This article examines the hedging effectiveness of U.S. stocks against uncertainties due to equity market (financial risk) and pandemics (health risk), including Covid‐19 pandemic. Consequently, we consider two categories of U.S. stocks—defensive and non‐defensive stocks drawn from 10 different sectors and distinctly analysed over two data samples—pre‐ and post‐Covid periods. We construct a predictive panel data model that simultaneously accounts for both heterogeneity and common correlated effects and also complementarily determine the predictive power of accounting for uncertainties in the valuation of U.S. stocks. We find that hedging effectiveness is driven by the types of stocks and measures of uncertainty. Defensive stocks provide a good hedge for pandemic‐induced uncertainty, and the hedging effectiveness is higher during calm market conditions as compared to turbulent conditions, while both categories lack hedging capability in the face of equity‐induced uncertainty. Finally, we find that the inclusion of uncertainty in the predictive model of U.S. stock returns improves its forecasts and this conclusion is robust to alternative measures of uncertainty and multiple forecast horizons.

3.
Quality & quantity ; : 1-20, 2022.
Article in English | EuropePMC | ID: covidwho-2058411

ABSTRACT

This study is motivated around the COVID-19 pandemic as a source of rising financial market risks. Hence, we investigate whether pandemic-induced risks can be hedged by alternative investment in financial innovations captured in exchange traded funds (ETFs). We explore the hedging effectiveness of sectoral ETFs along with a battery of robustness measures. Following the predictability analyses, we find that financial innovations captured in ETFs can effectively hedge both pandemic-induced and financially engineered market risks especially after controlling for the role of oil price in the predictive model. Our model provides better in-sample and out-of-sample forecasting accuracy and economic gains than the benchmark model and this is more pronounced for the COVID-19 pandemic period.

4.
Qual Quant ; 56(4): 2199-2214, 2022.
Article in English | MEDLINE | ID: covidwho-1959064

ABSTRACT

We assess the hedging capabilities of four prominent precious metals namely gold, palladium, platinum and silver against market risks due to epidemics and pandemics. The research objective is informed by the COVID-19 pandemic which amplifies health risks with attendant concerns for financial markets. We utilize the health-related uncertainty index developed by Baker et al. (Equity market volatility: infectious disease tracker [INFECTDISEMVTRACK], 2020) which measures uncertainty in the financial markets due to infectious diseases including the COVID-19 pandemic and construct a predictive model that accommodates the salient features of both the predictand and predictor series. Our results support the safe haven property only for gold before and during the COVID-19 pandemic. We push the analysis further for in-sample and out-of-sample forecast evaluation and find that accounting for uncertainty due to infectious diseases improves the forecast of the four precious metals relative to the benchmark model (historical average). We highlight for investors that the gold market remains the safest market among the precious metals particularly during the COVID-19 pandemic.

5.
Emerging Markets Finance and Trade ; : 1-12, 2022.
Article in English | Taylor & Francis | ID: covidwho-1852676
6.
International Review of Economics & Finance ; 2022.
Article in English | ScienceDirect | ID: covidwho-1712715

ABSTRACT

Motivated by the COVID-19 pandemic, we construct a single factor predictive model for stock returns that incorporates uncertainty index for pandemics and epidemics (UPE). Specifically, we examine whether Islamic stocks are either vulnerable or have better hedge potential when compared to the performance of their conventional counterparts. In general, we find that the Islamic stocks can be used to hedge whereas the conventional stocks are seen to be vulnerable to uncertainty due to pandemics across different time periods. In particular, during COVID-19 pandemic, although the hedging effectiveness of Islamic stock seems to decline, it is still better compared to the worse performance of the conventional stocks. The outcome remains the same even after controlling our model for oil price, geopolitical risk and economic policy uncertainty. We further evaluate the predictive power of the UPE both for the in-sample and out-of-sample periods by comparing its forecast performance with that of a benchmark model. Our results suggest that the consideration of the UPE information in the valuation of stocks is crucial for investment decisions.

7.
Financ Res Lett ; 47: 102519, 2022 Jun.
Article in English | MEDLINE | ID: covidwho-1487726

ABSTRACT

In this study, we offer a global perspective on the impacts of the COVID-19 pandemic on financial markets using a multi-country Threshold-Augmented Global Vector Autoregressive Model of Chudik et al. (2020). We document a negative impact of the pandemic on real equity prices across countries (except the United States) and country groupings with the highest negative impact recorded in 2020Q2. The biggest losers are the emerging economies while the biggest gainers are the United States whose real stock prices remain positive and the Euro Area that achieved real exchange rate appreciation when the financial markets were mostly vulnerable. Our results support the effectiveness of the quantitative easing policy regime in the Euro Area during the COVID-19 pandemic and also suggest hedging role for the US stocks among other suggested safe assets.

8.
Emerging Markets Finance and Trade ; : 1-9, 2021.
Article in English | Taylor & Francis | ID: covidwho-1462097
9.
Financ Innov ; 7(1): 34, 2021.
Article in English | MEDLINE | ID: covidwho-1223781

ABSTRACT

This study examines the hedging effectiveness of financial innovations against crude oil investment risks, both before and during the COVID-19 pandemic. We focus on the non-energy exchange traded funds (ETFs) as proxies for financial innovations given the potential positive correlation between energy variants and crude oil proxies. We employ a multivariate volatility modeling framework that accounts for important statistical features of the non-energy ETFs and oil price series in the computation of optimal weights and optimal hedging ratios. Results show evidence of hedging effectiveness for the financial innovations against oil market risks, with higher hedging performance observed during the pandemic. Overall, we show that sectoral financial innovations provide resilient investment options. Therefore, we propose that including the ETFs in an investment portfolio containing oil could improve risk-adjusted returns, especially in similar financial crisis as witnessed during the pandemic. In essence, our results are useful for investors in the global oil market seeking to maximize risk-adjusted returns when making investment decisions. Moreover, by exploring the role of structural breaks in the multivariate volatility framework, our attempts at establishing robustness for the results reveal that ignoring the same may lead to wrong conclusions about the hedging effectiveness.

10.
Global Finance Journal ; : 100641, 2021.
Article in English | ScienceDirect | ID: covidwho-1188583

ABSTRACT

In this paper, we test the role of news in the predictability of return volatility of digital currency market during the COVID-19 pandemic. We use hourly data for crypto currencies and daily data for the news indicator, thus, the GARCH MIDAS framework which allows for mixed data frequencies is adopted. We validate the presupposition that fear-induced news triggered by the COVID-19 pandemic increases the return volatilities of the crypto currencies compared with the period before the pandemic. We also establish that the predictive model that incorporates the news effects forecasts the return volatility better than the benchmark model, historical average.

11.
Sustainability ; 13(6):3212, 2021.
Article in English | MDPI | ID: covidwho-1136539

ABSTRACT

This study contributes to the emerging literature offering alternative measures of uncertainty due to the COVID-19 pandemic. We combine both news-and macro-based trends to construct an index. The former involves the use of Google trends with plausible variants of words used to capture the pandemic, which are combined using principal components analysis to develop a news-based index. For the macro-based index, we identify global factors such as oil price, stock price, Dollar index, commodity index and gold price, and thereafter we obtain the macro-based uncertainty using variants of stochastic volatility models estimated with Bayesian techniques and using a dynamic factor model. Consequently, the new (composite) index is constructed by combining the news- and macro-based indexes using principal components analysis. Our empirical applications of the index to the stock return predictability of the countries hit worst by the pandemic confirm the superiority of the composite index over the existing news-based index in both the in-sample and out-of-sample forecast horizons. Our results are also robust to forecast horizons and competing model choices.

12.
International Review of Economics & Finance ; 2021.
Article in English | ScienceDirect | ID: covidwho-1071507

ABSTRACT

The study evaluates the return and volatility transmission between the health and tourism stocks. The outbreak of Covid-19 pandemic brought about an unprecedented crisis in the global health and financial market with the tourism sector being among the largest casualty as it experiences an almost total collapse as a result of economic lockdowns and movement restrictions, while the health sector witnessed considerable boom. We employ the VARMA–CCC-AGARCH model, based on the conducted preliminary tests, on daily data collected for health and tourism stocks proxied using the Dow Jones US sector indices between January 02, 2018 and July 09, 2020. The empirical estimation is also partitioned into full sample, before and during Covid-19 periods to elicit the impact of the pandemic outbreak. We further examine the optimal weights of holding health and tourism stocks and compute the hedging ratios in the presence of health risks. Our empirical findings show evidence of significant negative bidirectional returns spillover transmission between the health and tourism sectors particularly during the Covid-19 period. In addition, the hedge ratios further confirmed the hedging effectiveness of health stocks for risks associated with tourism stocks which is also more noticeable in the pandemic period. Essentially, our results show that a diversified asset portfolio that includes health together with tourism stocks may improve risk-adjusted return performance for investors especially during pandemics.

13.
International Journal of Finance & Economics ; n/a(n/a), 2021.
Article in English | Wiley | ID: covidwho-1047178

ABSTRACT

Abstract The global lockdowns including movement restrictions during COVID-19 pandemic impacted the hospitality business negatively and by extension the trading of related stocks such as travel & tourism stocks. Owing to the long standing hedging potential of gold, we examine whether this potential can be extended to the travel & tourism stocks in order to hedge against the associated risks caused by the current pandemic. Using daily data from January 2016 to July 2020 and constructing optimal portfolio strategies, we find that gold serves as a very strong hedge and safe haven for travel & tourism stocks, most especially in the pandemic period. This conclusion validates the inclusion of gold in the diversified portfolio of travel & tourism stocks in order to improve the risk-adjusted return performance for investors in the sector particularly during COVID-19 pandemic.

14.
International Review of Financial Analysis ; : 101666, 2021.
Article in English | ScienceDirect | ID: covidwho-1023609

ABSTRACT

This study examines the safe haven prowess of gold against some exogenous shocks due to the COVID-19 pandemic. We further make a comparison of our findings with those obtained for the period before it. Our results confirm the potential of gold market to serve as a safe haven during the pandemic albeit with a higher effectiveness before the pandemic. Further results suggest that gold consistently offers better safe haven properties than the US stocks as well as other precious metals like Silver, Palladium and Platinum regardless of the period. Finally, we find that the predictive model that accounts for uncertainties outperforms the benchmark model that ignores the same both for the in- and out-of-sample forecast analyses.

15.
Borsa Istanbul Review ; 2020.
Article in English | ScienceDirect | ID: covidwho-947136

ABSTRACT

In this study, we examine the response of emerging stock markets due to the uncertainty of pandemics and epidemics (UPE), including the COVID-19 pandemic. We demonstrate this by evaluating the stock return predictability of 24 emerging market stocks using the new datasets on uncertainty due to pandemics as well as the global fear index for the COVID-19 pandemic. We partition the data sample into periods before and after the announcement of the COVID-19 pandemic and employ panel data techniques that account for salient features of both the series and predictive model. We found that emerging stock markets are more vulnerable to UPE than developed market stocks. Put differently, developed stock markets provide a better hedge against UPE than emerging stock markets. We also find that incorporating the UPE indicator in the valuation of stocks, particularly during pandemics, is crucial for investment decisions.

16.
Resour Policy ; 70: 101897, 2021 Mar.
Article in English | MEDLINE | ID: covidwho-845946

ABSTRACT

This paper assesses the role of gold as a safe haven or hedge against crude oil price risks. We employ the asymmetric VARMA-GARCH model, using daily data from January 2016 to August 2020. To account for the impact of COVID-19 pandemic, we partitioned the data into two to reflect the periods before and during the pandemic. Our empirical results find gold as a significant safe haven against oil price risks. The optimal portfolio and hedging analyses conducted also validate the hedging effectiveness of gold against risk associated with oil. The robustness of our results is further confirmed using three other prominent precious metals - silver, platinum, and palladium. In sum, our results are useful for investors and portfolio managers that are desirous of using gold and other precious metals as portfolio rebalancing tools to minimize or circumvent risks associated with volatile oil returns.

17.
Emerg. Mark. Financ. Trade ; 10(56): 2310-2331, 20200808.
Article in English | WHO COVID, ELSEVIER | ID: covidwho-671493

ABSTRACT

This paper offers two main innovations. First, we construct a global fear index (GFI) for the COVID-19 pandemic to support economic, financial, and policy analyses in this area. Second, we demonstrate the application of the index to stock return predictability using OECD data. The panel data predictability results reveal the significance of the index as a good predictor of stock returns during the pandemic. Also, we find that accounting for “asymmetry” effect and macro (common) factors improves the forecast performance of the GFI-based predictive model for stock returns. With regular updates and improvements of the index, several empirical analyses can be extended to other macroeconomic fundamentals in future research.

18.
J Behav Exp Finance ; 27: 100383, 2020 Sep.
Article in English | MEDLINE | ID: covidwho-665356

ABSTRACT

In this paper, we subject the global fear index (GFI) for the COVID-19 pandemic to empirical scrutiny by examining its predictive power in the predictability of commodity price returns during the pandemic. One of the attractions to the index lies in its coverage as all the countries and by extension regions and territories in the world are considered in the construction of the index. Our results show evidence of a positive relationship between commodity price returns and the global fear index, confirming that commodity returns increase as COVID-19 related fear rises. By way of extension, we further establish that commodity market offers better safe-haven properties than the stock market given the negative association between GFI and the latter. Finally, the GFI series improves the forecast accuracy of the predictive model for commodity price returns and its forecast outcome outperforms the historical average (constant returns) model both for the in-sample and out-of-sample forecasts. Our results are robust to alternative measures of pandemics.

19.
Int. Rev. Econ. Financ. ; (69): 280-294, 20200901.
Article in English | WHO COVID, ELSEVIER | ID: covidwho-627724

ABSTRACT

We provide some preliminary estimates about the behaviour of oil-stock nexus during COVID-19 pandemic. Consequently, we conduct distinct analyses for periods before and after the announcement of the pandemic. A panel Vector Autoregressive (pVAR) model is constructed to analyse the response of oil and stocks to shocks. A panel Logit model is also formulated to evaluate the probability of having negative oil price and stock returns between the two data samples. The pVAR analyses suggest that both oil and stock markets may experience greater initial and prolonged impacts of own and cross shocks during the pandemic than the period before it. This outcome is further corroborated by the panel Logit estimates suggesting that the probability of having negative oil and stock returns during the pandemic may be due uncertainty associated with the relevant markets.

20.
Int. Rev. Financ. Anal. ; (71)20201001.
Article in English | WHO COVID, ELSEVIER | ID: covidwho-627036

ABSTRACT

This study derives its motivation from the current global pandemic, COVID-19, to evaluate the relevance of health-news trends in the predictability of stock returns. We demonstrate this by using data covering top-20 worst-hit countries, distinctly in terms of reported cases and deaths. The results reveal that the model that incorporates health-news index outperforms the benchmark historical average model, indicating the significance of health news searches as a good predictor of stock returns since the emergence of the pandemic. We also find that accounting for “asymmetry” effect, adjusting for macroeconomic factors and incorporating financial news improve the forecast performance of the health news-based model. These results are consistently robust to data sample (both for the in-sample and out-of-sample forecast periods), outliers and heterogeneity.

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