Randomness, Informational Entropy, and Volatility Interdependencies among the Major World Markets: The Role of the COVID-19 Pandemic.

Salim Lahmiri,Stelios Bekiros

doi:10.3390/e22080833

Abstract

The main purpose of our paper is to evaluate the impact of the COVID-19 pandemic on randomness in volatility series of world major markets and to examine its effect on their interconnections. The data set includes equity (Bitcoin and Standard and Poor’s 500), precious metals (Gold and Silver), and energy markets (West Texas Instruments, Brent, and Gas). The generalized autoregressive conditional heteroskedasticity model is applied to the return series. The wavelet packet Shannon entropy is calculated from the estimated volatility series to assess randomness. Hierarchical clustering is employed to examine interconnections between volatilities. We found that (i) randomness in volatility of the S&P500 and in the volatility of precious metals were the most affected by the COVID-19 pandemic, while (ii) randomness in energy markets was less affected by the pandemic than equity and precious metal markets. Additionally, (iii) we showed an apparent emergence of three volatility clusters: precious metals (Gold and Silver), energy (Brent and Gas), and Bitcoin and WTI, and (iv) the S&P500 volatility represents a unique cluster, while (v) the S&P500 market volatility was not connected to the volatility of Bitcoin, energy, and precious metal markets before the pandemic. Moreover, (vi) the S&P500 market volatility became connected to volatility in energy markets and volatility in Bitcoin during the pandemic, and (vii) the volatility in precious metals is less connected to volatility in energy markets and to volatility in Bitcoin market during the pandemic. It is concluded that (i) investors may diversify their portfolios across single constituents of clusters, (ii) investing in energy markets during the pandemic period is appealing because of lower randomness in their respective volatilities, and that (iii) constructing a diversified portfolio would not be challenging as clustering structures are fairly stable across periods.

Highlights

Since the outbreak of the COVID-19 pandemic, various studies were conducted to investigate its effect on the economy, including its impact on the correlations between crude oil and agricultural futures [1], co-movement between COVID-19 and Bitcoin [2], the tourism industry [3], the covariance between temperature, COVID-19 and exchange rate in Wuhan [4], Italian manufacturing firms [5], B2B sales forces [6], efficiency of equity and cryptocurrency markets [7], airline employment [8], entrepreneurial uncertainty [9], consumer behavior [10], marketing innovations [11], corporate social responsibility and marketing [12], and randomness and mutual information between markets [13], Entropy 2020, 22, 833; doi:10.3390/e22080833 www.mdpi.com/journal/entropyEntropy 2020, 22, 833 to name few
During the pandemic period, the Standard and Poor’s 500 (S&P500) market volatility became connected to the cluster formed by Bitcoin and West Texas Instruments (WTI) market volatility and to the cluster formed by Brent and Gas market volatility
We examined the effect of the COVID-19 pandemic on information randomness in volatility of seven world major markets represented in three distinct groups: equity, precious metals, and energy markets

Summary

Introduction

Since the outbreak of the COVID-19 pandemic, various studies were conducted to investigate its effect on the economy, including its impact on the correlations between crude oil and agricultural futures [1], co-movement between COVID-19 and Bitcoin [2], the tourism industry [3], the covariance between temperature, COVID-19 and exchange rate in Wuhan [4], Italian manufacturing firms [5], B2B sales forces [6], efficiency of equity and cryptocurrency markets [7], airline employment [8], entrepreneurial uncertainty [9], consumer behavior [10], marketing innovations [11], corporate social responsibility and marketing [12], and randomness and mutual information between markets [13], Entropy 2020, 22, 833; doi:10.3390/e22080833 www.mdpi.com/journal/entropyEntropy 2020, 22, 833 to name few. The main purpose of the current study is (i) to evaluate the volatility randomness in Bitcoin, Standard and Poor’s 500 (S&P500), Gold, Silver, West Texas Instruments (WTI), Brent, and Gas market,. Our motivation for measuring randomness in volatility series is to evaluate the irregularity in information content in such series. Volatility series are good proxy of investor expectations and perceived risk. It is interesting to measure randomness in volatility series to assess the effect of the COVID-19 on regularity in investor’s expectations and perceived risk. The motivation for analyzing the volatility co-movements between Bitcoin, S&P500, Gold, Silver, WTI, Brent, and Gas, is twofold

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