Risk Spillover during the COVID-19 Global Pandemic and Portfolio Management

Mohamed Yousfi, Abderrazak Dhaoui and Houssam Bouzgarrou
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Mohamed Yousfi: High Commercial Studies Institute, University of Sousse, Sousse 4000, Tunisia
Abderrazak Dhaoui: LaREMFiQ, High Commercial Studies Institute, University of Sousse, Sousse 4000, Tunisia
Houssam Bouzgarrou: Higher Institute of Finance and Taxation, University of Sousse, Sousse 4000, Tunisia

JRFM, 2021, vol. 14, issue 5, 1-29

Abstract: This paper aims to examine the volatility spillover, diversification benefits, and hedge ratios between U.S. stock markets and different financial variables and commodities during the pre-COVID-19 and COVID-19 crisis, using daily data and multivariate GARCH models. Our results indicate that the risk spillover has reached the highest level during the COVID-19 period, compared to the pre-COVID period, which means that the COVID-19 pandemic enforced the risk spillover between U.S. stock markets and the remains assets. We confirm the economic benefit of diversification in both tranquil and crisis periods (e.g., a negative dynamic conditional correlation between the VIX and SP500). Moreover, the hedging analysis exhibits that the Dow Jones Islamic has the highest hedging effectiveness either before or during the recent COVID19 crisis, offering better resistance to uncertainty caused by unpredictable turmoil such as the COVID19 outbreak. Our finding may have some implications for portfolio managers and investors to reduce their exposure to the risk in their portfolio construction.

Keywords: COVID-19; hedging; Bitcoin; Islamic indices; dynamic conditional correlation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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