The behaviour of U.S. stocks to financial and health risks
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.
Full text:
Available
Collection:
Databases of international organizations
Database:
ProQuest Central
Type of study:
Prognostic study
Language:
English
Journal:
International Journal of Finance & Economics
Year:
2022
Document Type:
Article
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