Abstract
This paper studies the effect of COVID-19 on the volatility of Australian stock returns and the effect of negative and positive news (shocks) by investigating the asymmetric nature of the shocks and leverage impact on volatility. We employ a generalised autoregressive conditional heteroskedasticity (GARCH) model and extend the analysis using the exponential GARCH (EGARCH) model to capture asymmetry and allegedly leverage. We proxy the news related to the negative effect of COVID-19 on the Australian health system and its economy as bad news, and on the other hand, measures taken by government economic stimulus packages through their monetary and fiscal policies as good news. The S&P ASX200 (ASX-200) index is used as a proxy to the Australian stock market, and we use value-weighted returns of the stocks listed on ASX-200 for the period 27 January 2020 to 29 December 2020. The empirical results suggest the EGARCH model fits better in capturing asymmetry and leverage than the GARCH model in estimating the volatility of the Australian stock returns. However, another interesting finding is that the EGARCH model with volatility equation without news demonstrates a larger (smaller) leverage effect of the negative (positive) shocks on the conditional volatility compared to its variant with the news.
Highlights
The outbreak of COVID-19 in December 2019 and the consequent increase in uncertainty has had a massive financial effect on the real economy (Bakas and Triantafyllou 2020).The hike in uncertainty due to COVID-19 is typically associated with falling aggregate demand and, as a result, disrupting economic activity
This paper examines the impact of COVID-19 on the volatility of Australian stock returns
It further examines the presence of asymmetry and suspected leverage due to both negative and positive news on the volatility of Australian stock returns by employing GARCHX (1,1), exponential GARCH (EGARCH)(1,1) and News impact curve (NIC)
Summary
The outbreak of COVID-19 in December 2019 and the consequent increase in uncertainty has had a massive financial effect on the real economy (Bakas and Triantafyllou 2020). This unprecedented outcome upon human lives and on the global economy was due to many governments implementing drastic measures to prevent the spread of COVID-19. They instituted lockdowns, strict quarantine policies, social distancing (Rahman et al 2021) and travel bans both inward and outward. To combat the above adversaries, governments put huge economic stimulus packages through their monetary and fiscal policies. Australia adopted an expansionary monetary policy by reducing interest rates and simultaneously expansionary fiscal policy by increasing transfer payments. To save the COVID-19 smashed economy, the RBA slashed its official cash rate three times in 2020 and, in February 2021, decided to let it stay at its current level of 0.10%3
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