The COVID-19 Outbreak and Risk–Return Spillovers between Main and SME Stock Markets in the MENA Region

This study investigates return and asymmetric volatility spillovers and dynamic correlations between the main and small and medium-sized enterprise (SME) stock markets in Saudi Arabia and Egypt for the periods before and during the COVID-19 pandemic. Return and volatility spillovers are modelled using a VAR-asymmetric BEKK–GARCH (1,1) model, while a VAR-asymmetric DCC–GARCH (1,1) model is employed to model the dynamic conditional correlations between these markets, which are then used to determine and explore portfolio design and hedging implications. The results show that while bidirectional return spillovers between the main and SME stock markets are limited to Saudi Arabia, shock and volatility spillovers have different characteristics and dynamics in both main–SME market pairs. In addition, the dynamic correlations between the main and SME markets are mostly positive and have notably increased during the COVID-19 pandemic, particularly in Saudi Arabia, suggesting that adding SME stocks to a main stock portfolio enhances its risk-adjusted return, especially during tranquil market phases. One practical implication of our results is that the development of SME stock markets can indirectly contribute to economic development via the main market channel and provide an avenue for portfolio diversification and risk management.

The influence of the COVID-19 pandemic on the hedging functionality of Chinese financial markets.

In this paper, we investigate both constant and time-varying hedge ratios in terms of the effectiveness of CSI300 index futures during the COVID-19 crisis. Using naïve, OLS and EC/ROLS strategies to estimate constant hedge ratios, results indicate that the CSI300 spot index presents decreased effectiveness using the naïve hedging strategy; however, increased effectiveness of OLS and EC hedge ratios are identified. Differential behaviour is identified when considering five newly introduced COVID-19 concept-based stock indices. Time-varying hedge ratios indicate the weakened effectiveness, ranging between 20% and 40% variance reduction. Evidence suggests that the capability of the CSI300 index futures to hedge against the risks of the COVID-19 is impaired, regardless of whether constant or time-varying hedge ratios are used. Such results provide important implications to both local and foreign investors in the Chinese stock market.

Contagion and portfolio management in times of COVID-19.

This paper aims to investigate the COVID-19 pandemic impacts on the interconnectedness between the Chinese stock market and major financial and commodity markets-gold, silver, Bitcoin, WTI, S&P 500, and Euro STOXX 50-and analyze the portfolio design implications. Using daily data from 2018 to 2021, we first apply the wavelet power spectrum (WPS) to visualize volatility shifts. In contrast to previous research, we empirically identify the precise COVID-19 outbreak dates for each market using the Perron (1997) breakpoint test. Finally, we employ the bivariate DCC-GARCH model to analyze the connectedness between markets. The findings reveal that the COVID-19 pandemic caused volatility shifts of different intensities for all of the studied markets. Moreover, each return series exhibits one break date, which is specific to each market and corresponds to a distinct COVID-19-related event. Correlations, hedge ratios, and optimal portfolio weights changed significantly after the COVID-19 outbreak. There is evidence of contagion effects between the Chinese stock market and S&P 500, Euro STOXX 50, gold, and silver. Interestingly, the latter two assets lost their safe haven property with SSE. However, WTI and Bitcoin act as safe havens against SSE risks.

Discovering interlinkages between major cryptocurrencies using high-frequency data: new evidence from COVID-19 pandemic.

Through the application of the VAR-AGARCH model to intra-day data for three cryptocurrencies (Bitcoin, Ethereum, and Litecoin), this study examines the return and volatility spillover between these cryptocurrencies during the pre-COVID-19 period and the COVID-19 period. We also estimate the optimal weights, hedge ratios, and hedging effectiveness during both sample periods. We find that the return spillovers vary across the two periods for the Bitcoin-Ethereum, Bitcoin-Litecoin, and Ethereum-Litecoin pairs. However, the volatility transmissions are found to be different during the two sample periods for the Bitcoin-Ethereum and Bitcoin-Litecoin pairs. The constant conditional correlations between all pairs of cryptocurrencies are observed to be higher during the COVID-19 period compared to the pre-COVID-19 period. Based on optimal weights, investors are advised to decrease their investments (a) in Bitcoin for the portfolios of Bitcoin/Ethereum and Bitcoin/Litecoin and (b) in Ethereum for the portfolios of Ethereum/Litecoin during the COVID-19 period. All hedge ratios are found to be higher during the COVID-19 period, implying a higher hedging cost compared to the pre-COVID-19 period. Last, the hedging effectiveness is higher during the COVID-19 period compared to the pre-COVID-19 period. Overall, these findings provide useful information to portfolio managers and policymakers regarding portfolio diversification, hedging, forecasting, and risk management.

Financial contagion during COVID-19 crisis.

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.