Pandemic-related financial market volatility spillovers: Evidence from the Chinese COVID-19 epicentre

Shaen Corbet,Yang (Greg) Hou,Yang Hu,Les Oxley,Danyang Xu

doi:10.1016/j.iref.2020.06.022

Shaen Corbet, Yang (Greg) Hou + Show 3 more

Open Access

https://doi.org/10.1016/j.iref.2020.06.022

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Abstract

Utilising Chinese-developed data based on long-standing influenza indices, and the more recently-developed coronavirus and face mask indices, we set out to test for the presence of volatility spillovers from Chinese financial markets upon a broad number of traditional financial assets during the outbreak of the COVID-19 pandemic. Such indices are used to specifically measure the performance of Chinese companies who are inherently involved in the R&D and production of materials and products used to mitigate and counteract the effects of influenza and coronavirus, therefore, such indices present a unique barometer of broad population-based sentiment relating to COVID-19 in comparison to traditional Chinese influenza. Within days of the formal announcement of the COVID-19 outbreak, results indicate exceptionally pronounced and persistent impacts of the coronavirus pandemic upon Chinese financial markets, compared to that of the traditional and long-standing influenza index. Further, in a novel finding to date, COVID-19 is found to have had a substantial effect on directional spillovers upon the Bitcoin market. Cryptocurrency-based confidence appears to have been instigated through government-developed education schemes, which are identified as one possible explanation for our results, which are found to remain robust across both data-frequency and methodological variation.

Highlights

The COVID-19 pandemic that developed in Wuhan, China in late-2019, has presented a stark warning to international financial markets with regards to the exceptional vulnerabilities and fragility that can quickly transpire and disseminate
Each index represents the effects of COVID-19 on Chinese financial markets as measured through real-time investor sentiment
While international financial markets attempted to rapidly quantify and forecast perceptions of risk and financial loss associated with the official World Health Organization (WHO) announcement of the international outbreak of the COVID-19 pandemic in late-2019, it became quickly evident that investors were faced with quite unique economic, geopolitical and social challenges

Summary

Introduction

The COVID-19 pandemic that developed in Wuhan, China in late-2019, has presented a stark warning to international financial markets with regards to the exceptional vulnerabilities and fragility that can quickly transpire and disseminate. The first official identification by international organisations such as the World Heath Organisation (WHO), was on the 31 December 2019 Since these two dates, we have observed a worldwide economic slowdown that has thrust a number of countries into severe recessions, with the probability of a broad economic depression ever increasing. The pandemic does, present a unique opportunity to investigate two key questions: 1) how do volatility spillovers and episodes of financial market contagion behave during pandemics; and 2) how did Chinese coronavirus/influenza indices behave with regards to total and directional pairwise volatility spillovers. While investigating the traditional interactions between the Chinese coronavirus and influenza indices, and a number of traditional financial markets during the current pandemic, we test how volatility interactions differed in the aftermath of the coronavirus outbreak. Such research is of significant importance should population centres face repeated closures and lock-downs during future attempts to reduce the reproduction rates of COVID-19 and any other pandemics that we might face in the future

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