Abstract
Volatility is the most widespread measure of risk. Volatility modeling allows investors to capture potential losses and investment opportunities. This work aims to examine the impact of the two waves of COVID-19 infections on the return and volatility of the stock market indices of the euro area countries. The study also focuses on other important aspects such as time-varying risk premium and leverage effect. This investigation employed the Threshold GARCH(1,1)-in-Mean model with exogenous dummy variables. Daily returns of the euro area stock markets indices from 4 January 2016 to 31 December 2020 has been used for the analysis. The results reveal that euro area stock markets respond differently to the COVID-19 pandemic. Specifically, the first wave of COVID-19 infections had a notable impact on stock market volatility of euro area countries with middle-large financial centres while the second wave had a significant impact only on stock market volatility of Belgium.
Highlights
Euro Area during COVID-19Volatility is a measure of financial risk or uncertainty of equity portfolios
We find that almost all euro area countries show a weakening of the impact of COVID-19 as the crisis evolved
All the estimated models are correct but OMXBBPI, PSI 20 and SAX models could be improved to optimize serial autocorrelation. This empirical study applied the Threshold generalized autoregressive conditional heteroscedasticity (GARCH)(1,1)-in-mean model with exogenous dummy variables to analyze the impact of the COVID-19 infections waves on daily returns of euro area stock indices
Summary
Volatility is a measure of financial risk or uncertainty of equity portfolios. The degree of vulnerability of stock market indices to global financial crisis is a key factor which can help portfolio managers in optimizing their investment decisions [1,2,3]. The aim of this work is to evaluate the impact of COVID-19 pandemic on the return and volatility of equity markets in the euro area countries. The first COVID-19 infections were identified in Wuhan city, Hubei province of China in December 2019. On 21 February 2020, Northern Italy registered a significant increase of COVID-19 cases, while other European states started to report cases of infected people [4]. On 11 March 2020, the World Health Organization (WHO) declared COVID-19 a pandemic [5]
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