Bayesian nonlinear expectation for time series modelling and its application to Bitcoin.

This paper proposes a two-stage approach to parametric nonlinear time series modelling in discrete time with the objective of incorporating uncertainty or misspecification in the conditional mean and volatility. At the first stage, a reference or approximating time series model is specified and estimated. At the second stage, Bayesian nonlinear expectations are introduced to incorporate model uncertainty or misspecification in prediction via specifying a family of alternative models. The Bayesian nonlinear expectations for prediction are constructed from closed-form Bayesian credible intervals evaluated using conjugate priors and residuals of the estimated approximating model. Using real Bitcoin data including some periods of Covid 19, applications of the proposed method to forecasting and risk evaluation of Bitcoin are discussed via three major parametric nonlinear time series models, namely the self-exciting threshold autoregressive model, the generalized autoregressive conditional heteroscedasticity model and the stochastic volatility model. Supplementary Information: The online version contains supplementary material available at 10.1007/s00181-022-02255-z.

Do oil, gold and metallic price volatilities prove gold as a safe haven during COVID-19 pandemic? Novel evidence from COVID-19 data.

The spreading COVID-19 outbreak has wreaked havoc on the world's financial system that raises an urgent need for the re-evaluation of the gold as safe haven for their money because of the unprecedented challenges faced by markets during this period. Therefore, the current study investigates whether different asset class volatility indices affect desirability of gold as a safe-haven commodity during COVID-19 pandemic. Long run and the short run relationship of gold prices with gold price volatility, oil price volatility, silver price volatility and COVID-19 (measured by the number of deaths due to COVID) has been analyzed in the current study by applying ARDL Bound testing cointegration and non linear ARDL approach on daily time series data ranging from January 2020 to Dec 2021. Findings of the study suggest that in the long run, oil price volatility and gold price volatility positively affect the gold prices, whereas the effect of silver price volatility on gold prices is negative in the long run. However in the short run, all the three indices negatively impact the gold prices. In contrast, the impact of COVID-19 is positive both in the short run and in the long run that proves the validity of gold as safe haven asset in the time of the deadly pandemic. The findings of this study have significant implications and offer investors with some indications to hedge their investments by considering the gold's ability of safe haven during this era of pandemic.

Stock markets' reaction to COVID-19: the joint impact of uncertainty avoidance culture and government response–evidence from emerging countries

Purpose: The authors examine whether the uncertainty avoidance culture and the stringency of government response play a role in shaping the stock market's response to coronavirus disease 2019 (COVID-19). The authors find that investors' response to the pandemic will not only depend on their instinct of uncertainty aversion but also on their expectation about the effectiveness of the government measures. The uncertainty avoidance culture amplifies the irrational actions of investors. However, harsh government responses will weaken this effect. Harsh government responses also send a negative signal to the market about the extent of the pandemic and the economic damage caused by anti-COVID measures. Governments need to be balanced in imposing anti-COVID measurements to preserve market confidence. Design/methodology/approach: In this article, the authors investigate whether the stock market volatility of emerging countries is simultaneously driven by two factors: the uncertainty-aversion culture of investors in a country and the stringency of the government's response to the pandemic. The authors conduct an empirical study on a sample of 20 emerging countries during the period from January 2020 to March 2021. Findings: The authors find that the national-level uncertainty aversion amplifies the irrational actions of investors during the period of crisis. However, harsh government responses will weaken this effect. The authors' findings show evidence that investors' response to the pandemic will not only depend on their instinct of uncertainty aversion but also on their expectation about the effectiveness of the government measures. Although harsh government responses can stabilize the investors' sentiment in countries with high levels of uncertainty aversion, they also send a negative signal to the market about the extent of the pandemic as well as the economic damage caused by anti-COVID measures. Originality/value: First, the study's results complement evidence from existing studies on the effect of uncertainty avoidance culture in determining stock market responses to COVID-19. Second, an important difference from previous studies, this paper adds to the behavioral finance literature by showing that investors' investment decisions in the face of economic uncertainty are not driven solely by their cultural values but also by their expectation about the effectiveness of the government policy. During a crisis, when the market has neither rational information nor adequate experience to forecast the future, the government must play an important role in stabilizing investors' sentiment and reactions. © 2021, Emerald Publishing Limited.

Investor sentiment based on scaled PCA method: A powerful predictor of realized volatility in the Chinese stock market

In this study, we construct an investor sentiment indicator (SsPCA) to predict stock volatility in the Chinese stock market by applying the scaled principal component analysis (sPCA). As a new dimension reduction technique for supervised learning, sPCA is employed to extract useful information from six individual sentiment proxies and obtain the common variations to characterize the investor sentiment (SsPCA). The empirical results indicate that SsPCA is a significant and powerful volatility predictor both in and out of sample. We also employ the partial least squares (PLS)-based investor sentiment index, three extra sentiment measures in past studies, and six individual sentiment proxies for comparison, and find SsPCA outperforms them on predicting stock volatility in the Chinese stock market. More importantly, the predictability of SsPCA remains significant before and after the famous financial crises (the sub-prime mortgage crisis and Chinese stock market turbulence) and the spread of the pandemic (COVID-19). Additionally, our findings imply that SsPCA still plays an essential role in predicting sock volatility after considering the leverage effect. The robustness of SsPCA in volatility forecasting is further verified in various industry indices of the Chinese stock market. Finally, we state that the strong predictability of SsPCA is highly related to its dimensionality reduction. Our results indicate that SsPCA is a robust volatility predictor from various aspects and performs better compared with existing sentiment indicators. © 2022 Elsevier Inc.

Frequency connectedness and cross-quantile dependence among medicare, medicine prices and health-tech equity

We investigate the dynamic connectedness among health-tech equity and medicine prices (producer and consumer) and Medicare cost indices for the US market. In doing so, we apply Cross-Quantilogram Dynamic Connectedness based on Time-Varying Parameter Vector Autoregression (TVP-VAR) approaches to analyse historical high-frequency time-series data. TVP-VAR results show that health-tech equity is the highest volatility transmitter while Medicare price is the highest volatility receiver. We also find medicine producer price is the net volatility contributor while the retail price of medicine is the net volatility receiver. The Cross-Quantilogram analysis confirms a strong bivariate quantile dependence between respective markets at a higher quantile of each market. Cross-quantilogram demonstrates a higher level of connectedness among the markets when considering medium and long memory. We observe health-tech equity turned to be a profound volatility contributor, while medicine price (both producer and retail prices) and Medicare appeared to net volatility receiver during the time of COVID19 Pandemic. The financial performance of health-tech equity returns elevates the price volatility of medicine and eventually Medicare cost, which imply that equity return should be incorporated forming medicine prices. © 2022 Elsevier Ltd

Do stock market fear and economic policy uncertainty co-move with COVID-19 fear? Evidence from the US and UK

Purpose: The purpose of the paper is to investigate co-movement of major implied volatility indices and economic policy uncertainty (EPU) indices with both the health-based fear index and market-based fear index of COVID-19 for the USA and the UK to help investors and portfolio managers in their informed investment decisions during times of infectious disease spread. Design/methodology/approach: This study uses wavelet coherence approach because it allows to observe lead–lag nonlinear relationship between two time-series variables and captures the heterogeneous perceptions of investors across time and frequency. The daily data used in this study about the USA and the UK covers major implied volatility indices, EPU, health-based fear index and market-based fear index of COVID-19 for both the first and second waves of COVID-19 pandemic over the period from March 3, 2020 to February 12, 2021. Findings: The results document a strong positive co-movement between implied volatility indices and two proxies of the COVID-19 fear. However, in all the cases, the infectious disease equity market volatility index (IDEMVI), the COVID-19 proxy, is more representative of the stock market and exhibits a stronger positive co-movement with volatility indices than the COVID-19 fear index (C19FI). This study also finds that the UK's implied volatility index weakly co-moves with the C19FI compared to the USA. The results show that EPU indices of both the USA and the UK exhibit a weak or no correlation with the C19FI. However, this study finds a significant and positive co-movement of EPU indices with IDEMVI over the short horizon and most of the sampling period with the leading effect of IDEMVI. This study's robustness analysis using partial wavelet coherence provides further strengths to the findings. Research limitations/implications: The investment decisions and risk management of investors and portfolio managers in financial markets are affected by the new information on volatility and EPU. The findings provide insights to equity investors and portfolio managers to improve their risk management practices by incorporating how health-related risks such as COVID-19 pandemic can contribute to the market volatility and economic risks. The results are beneficial for long-term equity investors, as their investments are affected by contributing factors to the volatility in US and UK's stock markets. Originality/value: This study adds following promising values to the existing literature. First, the results complement the existing literature (Rubbaniy et al., 2021c) in documenting that type of COVID-19 proxy matters in explaining the volatility (EPU) relationships in financial markets, where market perceived fear of COVID-19 is appeared to be more pronounced than health-based fear of COVID-19. Second, the use of wavelet coherence approach allows us to observe lead–lag relationship between the selected variables, which captures the heterogeneous perceptions of investors across time and frequency and have important insights for the investors and portfolio managers. Finally, this study uses the improved data of COVID-19, stock market volatility and EPU compared to the existing studies (Sharif et al., 2020), which are too early to capture the effects of exponential spread of COVID-19 in the USA and the UK after March 2020. © 2022, Emerald Publishing Limited.

COVID-19 related stringencies and financial market volatility: sectoral evidence from India

Purpose: This study aims to examine the impact of the stringency of COVID-19 protocols on the volatility of sectoral indices during the period 03:2020–05:2021. Specifically, this study investigates the role of economic disturbances on sectoral volatility by applying a range of conditional volatility techniques. Design/methodology/approach: For this analysis, two approaches were adopted. The first approach considers COVID stringency as a factor in the conditional variance equation of sectoral indices. In contrast, the second approach considers the stringency indicator as a possible determinant of their estimated conditional volatility. Findings: Results show that the stringency of the protocols throughout the pandemic phase led to an instantaneous spike followed by a gradual decrease in estimated volatility of all the sectoral indices except pharma and health care. Specific sectors such as bank, FMCG, consumer durables, financial services, IT, media and private banks respond to protocols expeditiously compared to other sectors. Originality/value: The key contribution of this study to the existing literature is the innovative approach. The inclusion of the COVID stringency index as a regressor in the variance equation of the conditional volatility techniques was a distinctive approach for assessing the volatility dynamics with the stringency of COVID protocols. Furthermore, this study also adopts an alternative approach that estimates the conditional volatility of the indices and then tests the effect of the stringencies on estimated volatility in a regression framework. © 2022, Emerald Publishing Limited.

Investor Attention and Global Stock Market Volatility: Evidence from COVID-19

This paper utilizes intraday five-minute stock market indices to investigate the causal relation between global stock market volatility and investor attention measured by the Google search volume index during the COVID-19 pandemic. Using the bi-power variation method proposed by Barndorff-Nielsen and Shephard (2004), we separate the realized volatility into two components: Continuous and Jump. Based on 5,583 stock indices-day observations, we find that investor attention is positively related to the realized volatility and its continuous component, but to a lesser extent to jumps. A growth in confirmed cases is positive to all measures of market volatility. Moreover, when the number of confirmed cases increases, more attentive investors reduce market volatility. Our findings are robust regarding various estimation approaches and are less likely to suffer from omitted variable biases and endogeneity concerns. Understanding the findings revealed in this paper is crucial to regulators and policymakers as warnings of additional risks facing retail investors around the globe over the extremely volatile periods. JEL Codes: G14;G15;G40;G41 © 2023 Institute of Financial Management and Research.

Cryptocurrency spectrum and 2020 pandemic: Contagion analysis

While several studies evaluate the impacts of the novel coronavirus pandemic on different markets, it is worth the while to also examine its contagion (fractal) effect on the top (based on their market capitalization) twenty cryptocurrency markets. These cryptocurrency markets' information (return and volatility) were sampled for both the ex-ante and ex-post coronavirus outbreak periods for this event study analysis. The detrended cross-correlation approaches are employed for both the main and robustness analyses. The results are robust and confirm a significant fractal contagion effect of the pandemic on the cryptocurrency space through their return and volatility. The contagion effect is relatively stronger for the crypto markets' volatilities compared to the returns, nonetheless. Hence, this study supports the contagious effect of the coronavirus pandemic on the cryptocurrency markets and its policy implications for investors in the crypto space. © 2022 Elsevier Inc.

Dissecting hedge funds' strategies

This paper dissects the dynamics of the hedge fund industry with four financial markets, including the equity market, commodities, currencies, and debt market by employing a large number of assets from these markets. We employ four main representative hedge fund strategy indices, and a cap-weighted global index to estimate an asymmetric dynamic conditional correlation (ADCC) GJR-GARCH model using daily data from April 2003 to May 2021. We break down the performance, riskiness, investing style, volatility, dynamic correlations, and shock transmissions of each hedge fund strategy thoroughly. Further, the impact of commodity futures basis on hedge funds' return is analyzed. Comparing the dynamic correlations during the 2008 global financial crisis (GFC) with COVID-19 pandemic reveals changing patterns in hedge funds' investing styles. There are strong and pervasive shock spillovers from hedge fund industry to other financial markets, especially to futures commodities. An increase in the futures basis of several commodities drives up hedge funds' performance. While hedge fund industry underperforms compared to equity market and commodities, the risk-reward measures show that hedge funds are superior to other markets, and safer than the bond market. © 2022 Elsevier Inc.

Connectedness among various financial markets classes under Covid-19 pandemic and 2022 Russo-Ukrainian war: evidence from TVP-VAR approach

PurposeThis paper examines the time-varying return connectedness between renewable energy, oil, precious metals, the Gulf Council Cooperation region and the United States stock markets during two successive crises: the pandemic Covid-19 and the 2022 Russo-Ukrainian war. The main objective is to investigate the effect of the Covid-19 pandemic and the Russo-Ukrainian war on the connectedness between the considered stock markets. Design/methodology/approachThis paper uses the time-varying parameter vector autoregression approach, which represents an extension of the Spillover approach (Diebold and Yilmaz, 2009, 2012, 2014), to examine the time-varying connectedness among stock markets. FindingsThis paper reflects the effect of the two crises on the stock markets in terms of shock transmission degree. We find that the United States and renewable energy stock markets are the main net emitters of shocks during the global period and not just during the two considered crises sub-periods. Oil stock market is both an emitter and a receiver of shocks against Gulf Council Cooperation region and United States markets during the full sample period, which may be due to price fluctuation especially during the two crises sub-periods, which suggests that the future is for renewable energy. Originality/valueThis paper examines the effect of the two recent and successive crises, the Covid-19 pandemic and the 2022 Russo-Ukrainian war, on the connectedness among traditional stock markets (the United States and Gulf Council Cooperation region) and commodities stock markets (renewable energy, oil and precious metals).

Investing in virtue and frowning at vice? Lessons from the global economic and financial crisis

Socially responsible mutual funds (SRMF) , the "antisocially conscious", Vitium Global Fund Barrier Fund (formerly known as the Vice Fund, the term used in this paper) returns, volatility patterns , causal effects are examined in this study within the context of the lessons learned from the 2008 Global Economic and Financial Crisis (GEFC). In times of a new and unprecedented crisis due to the COVID-19 pandemic, a look back to our recent past reveals that volatility patterns on daily stock returns presented some level of predictability on prices for both types of funds. The research findings are significant as funds' potential predictability could help market players when designing their investment strategies. More specifically, an increase in volatility persistence is found after the GEFC, together with an increase in the Vice Fund's resilience to market shocks. Although all funds, without substantial differences, take time to absorb the shocks. A noteworthy outcome relates to SRMF that was able to achieve higher returns and exhibited lower volatility levels during the crisis period. Whereas the Vice Fund revealed long-run sustainable performance offering fund managers and investors investment opportunities that are endorsed by the fund performance over the period. Furthermore, unidirectional causality was found running from the Vice Fund to the SRMF, exhibiting a clear dominance during the GEFC period. The research findings contribute to the debate on the future of socially responsible investment, indicating that SRMF appears to be driven by "antisocially conscious" funds signaling limited rewards for investors inclined to invest in funds that are considered socially responsible.

Do Banking and Financial Services Sectors Show Herding Behaviour in Indian Stock Market Amid COVID-19 Pandemic? Insights from Quantile Regression Approach

In India, the coronavirus (COVID-19) pandemic-induced country-wide regulatory lockdown and consequential supply-chain disruptions and market instability have all posed serious challenges before the regulators and policymakers. Amid the pandemic, the stock market showed return volatilities primarily due to the unexpected investors' behaviour. One of the behavioural biases is herding, which has the power to wreck the market equilibrium and shatter the market efficiency. Given that the pandemic has generated unprecedented spirals of uncertainties across the globe, thereby creating interruptions in the pattern of stock market investment decisions, this study examined the herding behaviour of 54 stocks of banking and financial services sectors listed in the national stock exchange. In the quantile regression framework, the study provides evidence of the presence of herding for public sector banking and financial services under the bull market conditions during the pandemic in the 90th quantile of the return distribution. This finding has implications for the mispricing of financial assets in these sectors. So, the study suggests removing information asymmetry among the market participants and devising policy initiatives for ensuring market stability. © 2023 Association of Asia Scholars.

Economic policy uncertainty and environmental governance company volatility: Evidence from China

This study primarily investigates whether China's economic policy uncertainty (EPU) can predict the environmental governance index volatility, which selects companies regarding environmental protection such as sewage treatment, solid waste treatment, air treatment, and energy saving. Empirical results reveal that China's EPU index can predict the environmental governance index volatility. Furthermore, even during periods of fluctuating volatility and the COVID-19 pandemic, China's EPU index can reliably forecast the environmental governance index volatility. This paper tries to provide new evidence regarding the connection between EPU and environmental governance companies' stock volatility. © 2023

Climate policy uncertainty and stock market volatility: Evidence from different sectors

This paper mainly investigates whether the climate policy uncertainty index (CPU) can predict the volatility of Chinese stock market volatility considering different sectors. Out-of-sample results show that climate policy uncertainty index can have a greater effect on the utility sector. We also investigate the effects of CPU based on longer horizons, different volatility levels and the COVID-19 pandemic. This paper tries to provide new evidence based on sector stock indices. © 2022

Volatility spillover across Chinese carbon markets: Evidence from quantile connectedness method

The paper investigates the volatility spillover across China's carbon emission trading (CET) markets using the connectedness method based on the quantile VAR framework. The non-linear result shows strong volatility spillover effects in upper quantiles, resulting from major economic and political events. This is in accordance with the risk contagion hypothesis that volatility of carbon price returns is affected by the shocks of economic fundamentals and spills over to other pilots. Guangdong and Shanghai are the most significant contributors to volatility transmission because of their high liquidity and active markets. Hubei CET pilot has shifted from transmitter to receiver since the COVID-19 pandemic. Regarding the pairwise directional connectedness, geographical location and similar market attribute also matter in volatility transmission. This provides implications for policymakers and investors to attach importance to risk management given the quantile-based method rather than the average shocks. © 2023 Elsevier B.V.

Forecasting global stock market volatilities in an uncertain world

We investigate the predictive relationship between uncertainty and global stock market volatilities from a high-frequency perspective. We show that uncertainty contains information beyond fundamentals (volatility) and strongly affects stock market volatility. Using several crucial uncertainty measures (i.e., uncertainty and implied volatility indices), we prove that the CBOE volatility index (VIX) performs best in point (density) forecasting;the financial stress index (FSI) in directional forecasting. Furthermore, VIX's predictive power improved dramatically after the COVID-19 outbreak, and the VIX-based portfolio strategy enables mean-variance investors to achieve higher returns. There are two empirical properties of VIX: (i) it helps reduce significantly forecast variance rather than bias;and (ii) its forecasts encompass other uncertainty forecasts well. Overall, we highlight the importance of considering uncertainty when exploring the expected stock market volatility. © 2022 Elsevier Inc.

On the volatility of WTI crude oil prices: A time-varying approach with stochastic volatility

This study investigates the impacts of crude oil-market-specific fundamental factors and financial indicators on the realized volatility of West Texas Intermediate (WTI) crude oil price. A time-varying parameter vector autoregression model with stochastic volatility (TVP-VAR-SV) is applied to weekly data series spanning January 2008 to October 2021. It is found that the WTI oil price volatility responds positively to a shock in oil production, oil inventories, the US dollar index, and VIX but negatively to a shock in the US economic activity. The response to the EPU index was initially positive and then turned slightly negative before fading away. The VIX index has the most significant effect. Furthermore, the time-varying nature of the response of the WTI realized oil price volatility is evident. Extreme effects materialize during economic recessions and crises, especially during the COVID-19 pandemic. The findings can improve our understanding of the time-varying nature and determinants of WTI oil price volatility. © 2022

Quantile time-frequency connectedness between cryptocurrency volatility and renewable energy volatility during the COVID-19 pandemic and Ukraine-Russia conflicts

Our article employs a quantile vector autoregression (QVAR) to identify the connectedness of seven variables from April 1, 2019, to June 13, 2022, in order to examine the relationships between crypto volatility and energy volatility. Our findings reveal that the dynamic connectedness is approximately 25% in the short term and approximately 9% in the long term. The 50% quantile equates to the overall average connectedness of the entire period, according to dynamic net total directional connectedness over a quantile, which also indicates that connectedness is very intense for both highly positive changes (above the 80% quantile) and crypto and energy volatility (below the 20% quantile). With the exception of the early 2022 period when the Crypto Volatility Index transmits a net of shocks because of the Ukraine-Russia Conflict, dynamic net total directional connectedness implies that in the short term, the Crypto Volatility Index acts as a net shock receiver across time. While this indicator is a net shock receiver for long-term dynamics, wind energy is a net shock transmitter during the short term. Green bonds are a short-term net shock receiver. This role is valid in the long term. Clean energy and solar energy are the long-term net transmitters of shocks;nevertheless, the series is always and only momentarily a net receiver of shocks because of the short-term dynamics. Natural gas and crude oil play roles in both two quantiles. Dynamic net pairwise directional connectedness over a quantile suggests that uncertain events like the COVID-19 epidemic or Ukraine-Russia Conflict influence cryptocurrency volatility and renewable energy volatility. © 2022 Elsevier Ltd

How the effective reproductive number impacts global stock markets

The pandemic caused by the novel coronavirus COVID-19 has impact the economies of countries across the world. In a short period of time, researchers have begun to analyse the effect of the pandemic on global stock markets. Although the most known measurements of COVID-19 are the number of new cases and deaths, there are more robust indicators. In particular, the effective reproductive number is one of the most important indicators to analyse the pandemic which indicates the degree to which the spread is under control. In this paper, we assess the impact that the Effective Reproductive Number (Rt) has on 26 countries around the world (32 stock market indexes) comparing the performance of various forms of Generalized AutoRegressive Conditional Heteroskedasticity models. The results demonstrate that of the 32 stock markets analysed, 37.5% had a negative effect with respect to Rt and only in 12.5% of the cases was the effect of the variation of Rt positive. This implies that in more than a third of the stock markets analysed as the pandemic progressed uncontrolled the result was a decrease in the value of the market index. The 11 of the 26 countries analysed had a negative and significant effect (Brazil, Germany, Indonesia, Israel, Italy, Japan, Russia, South Korea, Sweden, Taiwan, and United States). Findings suggest that the Effective Reproductive Number volatility had a significant impact on 10 of the 26 countries analysed (38.5%) (Australia, Brazil, Canada, China, India, Italy, Mexico, Russia, Singapore and United Kingdom). © 2023 John Wiley & Sons Ltd.