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Contagion and portfolio management in times of COVID-19

Olfa Belhassine and Chiraz Karamti

Economic Analysis and Policy, 2021, vol. 72, issue C, 73-86

Abstract: This paper aims to investigate the COVID-19 pandemic impacts on the interconnectedness between the Chinese stock market and major financial and commodity markets—gold, silver, Bitcoin, WTI, S&P 500, and Euro STOXX 50—and analyze the portfolio design implications. Using daily data from 2018 to 2021, we first apply the wavelet power spectrum (WPS) to visualize volatility shifts. In contrast to previous research, we empirically identify the precise COVID-19 outbreak dates for each market using the Perron (1997) breakpoint test. Finally, we employ the bivariate DCC-GARCH model to analyze the connectedness between markets. The findings reveal that the COVID-19 pandemic caused volatility shifts of different intensities for all of the studied markets. Moreover, each return series exhibits one break date, which is specific to each market and corresponds to a distinct COVID-19-related event. Correlations, hedge ratios, and optimal portfolio weights changed significantly after the COVID-19 outbreak. There is evidence of contagion effects between the Chinese stock market and S&P 500, Euro STOXX 50, gold, and silver. Interestingly, the latter two assets lost their safe haven property with SSE. However, WTI and Bitcoin act as safe havens against SSE risks.

Keywords: COVID-19; China; Dynamic conditional correlations; Hedge ratios; Volatility; Break dates (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:72:y:2021:i:c:p:73-86

DOI: 10.1016/j.eap.2021.07.010

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