The behaviour of U.S. stocks to financial and health risks
Afees Salissu,
Ibrahim Raheem and
Godstime Eigbiremolen
MPRA Paper from University Library of Munich, Germany
Abstract:
This article examines the hedging effectiveness of U.S. stocks against uncertainties due to equity market (financial risk) and pandemics (health risk), including Covid-19 pandemic. Consequently, we consider two categories of U.S. stocks—defensive and non-defensive stocks drawn from 10 different sectors and distinctly analysed over two data samples—pre- and post-Covid periods. We construct a predictive panel data model that simultaneously accounts for both heterogeneity and common correlated effects and also complementarily determine the predictive power of accounting for uncertainties in the valuation of U.S. stocks. We find that hedging effectiveness is driven by the types of stocks and measures of uncertainty. Defensive stocks provide a good hedge for pandemic-induced uncertainty, and the hedging effectiveness is higher during calm market conditions as compared to turbulent conditions, while both categories lack hedging capability in the face of equity-induced uncertainty. Finally, we find that the inclusion of uncertainty in the predictive model of U.S. stock returns improves its forecasts and this conclusion is robust to alternative measures of uncertainty and multiple forecast horizons.
Keywords: Covid-19; defensive stocks; forecast evaluation; non-defensive stocks; pandemics; panel data; uncertainty; U.S. stocks (search for similar items in EconPapers)
JEL-codes: F15 G10 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (6)
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Related works:
Journal Article: The behaviour of U.S. stocks to financial and health risks (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:105354
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