Diffusion of COVID-19 impact across selected stock markets: a wavelet coherency analysis

Taufeeque Ahmad Siddiqui,Haseen Ahmed,Mohammad Naushad

doi:10.21511/imfi.17(4).2020.19

Abstract

COVID-19 has impacted the world economy in an unprecedented manner; the financial markets indicate the same. This spontaneous event landed most of the stock markets into extreme volatility. Large capital outflow and extreme rapid fall were seen among almost all the world financial markets. Though similar trend prevailed everywhere during this pandemic, the impact could not be accumulated in absolute terms. Using the data of five stock markets, the current study endeavored to draw an impact of COVID-19 on major stock exchanges. The study uses wavelet coherency analysis on one-year daily data from June 2019 to May 2020 of five stock markets: Bombay Stock Exchange (BSE), London Stock Exchange (LSE), NASDAQ, Tokyo Stock Exchange (Nikkei), and Shanghai Stock Exchange. It is observed that there are time-variation and scale-variation in co-movements between the studied markets. During the crisis, the co-movement concentrates on a short time scale, even for two days. These results have significant implications for international investors, which will help them in portfolio diversification with time elements. All the stock markets under study have indicated co-movement at different time scales and frequencies with varying cross-power levels. However, the concentration of co-movement is found the most between the UK and the US stock markets. It is the least between Japan and the UK. In BSE, co-movement at shorter time scales started late. NASDAQ is leading only in one case, i.e., Shanghai Stock Exchange. BSE is not leading any stock index. LSE is in the leading position in all four cases. It has also been observed that co-movement started to concentrate at a shorter time scale as soon as the impact of the crisis increased.

Highlights

The impact of COVID-19 on stock markets has been the most destructive after the Global Financial Crisis of 2008
Cross-wavelet power signifying the level direction of arrows is largely right up, indicating of correlation between the time series is the high- the dominancy of Shanghai Stock Exchange in est (0.7) with dark color areas, whereas blue color leading the co-movement between Shanghai Stock indicates no relationship between the variables Exchange and Bombay Stock Exchange (BSE)
Most ment between the markets before the COVID-19 of the arrows are in the right direction, indicat- pandemic, but it is weaker at a longer time scale ing that London Stock Exchange is leading BSE. than the COVID-19 pandemic

Summary

INTRODUCTION

The impact of COVID-19 on stock markets has been the most destructive after the Global Financial Crisis of 2008. The past several studies have proved that the co-movement or integration between the stock markets further increases during the crisis. The present study analyzes the dynamic co-movement relationship between different stock markets in the background of the COVID-19 pandemic. Various studies find market co-movement during the review of earlier studies reveals that the US sub-prime crisis The earliest use of wavelet analysis in studying the frequency domain, unlike the mentioned methrelationship between economic and financial var- ods, which ignore the relationship in the frequeniables is found in the work of Ramsey and Zhang cy domain Rau and Nunes (2009) investigated the is examined in different time and frequency doco-movement between stock markets of the UK, main.

RESEARCH METHODOLOGY

Findings

CONCLUSION AND IMPLICATIONS