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.
Highlights
This is followed by a stand-alone section on robustness, which deals with sensitivity checks, where the results from our empirical model is compared with the results obtainable using news-based and macro-based models, and an alternative volatility index by Chicago Board Options Exchange (CBOE)
The empirical results from our heterogeneous static and dynamic common-correlated effects (CCE) estimators are presented in Tables 3 and 4; where Table 3 presents the results for the predictability of news-based and news–macro composite COVID-19-induced uncertainty for stock market returns of the 20 worst-hit countries by COVID-19
This study is an intellectual contribution to the extant literature that have measured uncertainty due to the COVID-19 pandemic, and improves upon this literature by proposing a new index for measuring the uncertainty due to the pandemic, given the implications of the pandemic for financial markets and investors
Summary
The authors of [10] report that the number of COVID-19 pandemic cases per million has significant negative effects on global financial markets, while [6] indicated that stock markets responded negatively to the growth in COVID19 confirmed cases. [15] notes the COVID-19 fractal contagion effects on the stock market fizzle over the medium- and long-term. This position is supported by [20], which finds that the negative impact of COVID-19 on emerging stock markets has gradually fallen, and begun to taper off in mid-April
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