Volatility spillovers and hedging effectiveness between health and tourism stocks: Empirical evidence from the US

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.