The impact of COVID-19 pandemic shock on major Asian stock markets: evidence of decoupling effects

Abstract

Introduction. Despite the start of the outbreak of the virus (COVID-19) was in December 2019, stock markets did not respond immediately as there was little information about the expected duration of the crisis and whether China would be able to contain it within a short period of time, and the risks entailing to the global economy due to the virus spread becoming pandemic that endanger the global health situation. As a result of the great uncertainty that prevailed among investors in the third week of February, stock markets around the world incurred trillions of US dollars in losses in a single week (ending February) seen as the worst week for financial markets since the 2008 global financial crisis. The initial purpose of this paper is to assess the reaction of major Asian stock markets to the early outbreak of COVID-19 pandemic and its spillover effects among these markets. Material and methods. To capture switching behavior of major Asian stock markets due to the early outbreak of COVID-19, the paper uses daily price indexes of Shanghai composite, Hong Kong, Nikkei 225, and Korea stock market, during the period from December 2, 2019 to March, 13,2020. Markov switching dynamic regression (MSDR) employed to assess the behavior of each market to the response of the other markets’ behavior. Results. Our finding indicate evidence of two states that distinguish the behavior of the stock markets during the early outbreak of the pandemic. In state 1, when the significance of the pandemic was not fully realized there was a strong link and influence between these markets, but in state 2, when the scale and size of the pandemic realized these markets displayed decoupling behavior. Results also indicate, Hong Kong and Nikkie stock markets were the epicenter in both states. The impact of the pandemic news on the behavior of these markets as indicated by the transition probabilities of state 2, varied from 3 days duration effect (Hong Kong) to 3month duration effect (Nikkei 225). Discussion and conclusions. The interactive association between these stock markets is important for investors as well as for policy-makers. Increasing departure of stock prices from their fundamental driver, that is the common economic bonds linking these markets, implies increasing risk for investors in these stock markets. The duration of the shock as indicated by the transition probabilities show that Hong Kong stock exchange was the most resilient in the group, while Nikkei was the most reactive to the pandemic shock.