Abstract
Using the daily data covering both the first and second wave of COVID-19 pandemic over the period from March 3, 2020, to February 12, 2021, this study documents a strong positive comovement between implied volatility indices and two proxies of the COVID-19 fear. However, in all the cases, the infectious disease equity market volatility index (IDEMVI), the COVID-19 proxy that is more representative of the stock market, exhibits a stronger positive comovement with volatility indices than the COVID-19 health-based fear index. We also find that the UK's implied volatility index weakly co-moves with the COVID-19 health-based fear index compared to the US. Our results show that EPU indices of both the US and UK exhibit a weak or no correlation with the COVID-19 health-based fear index. However, we find a significant positive co-movement between EPU indices and IDEMVI over the short-horizon and most of the sampling period with the leading effect of IDEMVI.
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