Intraday Volatility Spillovers among European Financial Markets during COVID-19

Faheem Aslam,Paulo Ferreira,Beenish Bashir,Khurrum Shahzad Mughal

doi:10.3390/ijfs9010005

Abstract

During crises, stock market volatility generally rises sharply, and as consequence, spillovers are identified across markets. This study estimates the volatility spillover among twelve European stock markets representing all four regions of Europe. The data consists of 10,990 intraday observations from 2 December 2019 to 29 May 2020. Using the methodology of Diebold and Yilmaz, we use static and rolling windows to characterize five-minute volatility spillovers. Our results show that 77.80% of intraday volatility forecast error variance in twelve European markets comes from spillovers. Furthermore, the highest gross directional volatility spillovers are found in Sweden and the Netherlands, while the minimum spillovers to other stock markets are observed in the stock markets of Poland and Ireland. However, German and Dutch markets transmit the highest net directional volatility spillovers. Splitting the whole sample in pre- and post-pandemic declaration (11 March 2020) we find more stable spillovers in the latter. The findings reveal important information about European stock market interdependence during COVID-19, which will be beneficial to both policy-makers and practitioners.

Highlights

IntroductionThe very first case of coronavirus (COVID-19) was reported in Wuhan, China, on 31 December 2019
As an unanticipated disease, the very first case of coronavirus (COVID-19) was reported in Wuhan, China, on 31 December 2019
The results show that gross directional volatility spillovers from the other markets to Belgian stocks is 80.72% followed by Germany with 80.62%, while the minimum spillovers from other markets are found in Poland, explaining 69.862% of the forecast error variance

Summary

Introduction

The very first case of coronavirus (COVID-19) was reported in Wuhan, China, on 31 December 2019. Over time its concentration has shifted from China to Europe and to the American continent, mostly North America. The immediate solution to avoid its spread was isolation, and lockdown was applied in most countries. General lockdown, is used to represent a simultaneous restriction on economic and social activity in many countries. The restrictions on domestic and international travel and ensuing disruption of supply chains led to predictions of economic crisis by the International Monetary Fund (IMF) and all other international agencies, who revised their global growth projections. Lockdown and other restrictions have had an effect on the sports and entertainment industries (Horowit 2020, Elliot 2020)

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Results

Conclusion