CAPITAL MARKET CORRELATIONS STRUCTURE DURING THE COVID-19 CRISIS

Ioan Roxana
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Ioan Roxana: WEST UNIVERSITY OF TIMISOARA, FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION

Annals - Economy Series, 2020, vol. 6, 67-79

Abstract: The current Covid-19 crisis had a negative impact on the society and economy in general and on the capital markets in particular. Even if, at least in the first few months, the pandemics acted only as an exogenous shock upon the capital markets, its influence was clearly reflected in negative market returns, even if the economic activity hadn’t yet been affected by restrictions. Our paper aims to study the correlations structure evolution within the U.S. stock market, from the 2019 “business as usual” times to the turbulent and volatile period of2020. The methodology used in our study involves in the first place a market efficiency analysis, based on an econo-physics approach, combining a Hurst exponent and two fractal dimension estimators, meant to reveal any changes in the correlation structureof the daily returns. The second part of our study conducts a Principal Component Analysis, in order to compare the number of principal components able to explain a certain threshold of variation in 2020, in respect to 2019. The results confirm the existence of increasing correlations within the market as the pandemics expanded, proving that imitation induced by panic and ultimately herding appeared inside the market, as investors were affected by the imminence of the Covid-19 disease on a psychological basis.

Keywords: correlations structure; market efficiency; Hurst exponent; fractal dimension; Principal Component Analysis; herding behaviors (search for similar items in EconPapers)
Date: 2020
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