Assessing the Pandemic Aviation Crisis: Speculative Behavior, Government Bail Outs, and Accommodative Monetary Policy

Viviana Costa, Maria Alberta Oliveira () and Carlos Santos
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Viviana Costa: Business Sciences Department, University of Maia, Avenida Carlos de Oliveira Campos—Castêlo da Maia, 4475-690 Maia, Portugal
Maria Alberta Oliveira: Business Sciences Department, University of Maia, Avenida Carlos de Oliveira Campos—Castêlo da Maia, 4475-690 Maia, Portugal
Carlos Santos: Business Sciences Department, University of Maia, Avenida Carlos de Oliveira Campos—Castêlo da Maia, 4475-690 Maia, Portugal

Economies, 2024, vol. 12, issue 10, 1-24

Abstract: The COVID-19 pandemic was a health, economic, and financial crisis. The aviation sector was one of the most severely hit. Despite the extensive literature on this, COVID-Finance has been focused on stock returns, neglecting what could be learnt from the spreads of airlines’ credit default swaps (CDSs). This would seem of the utmost importance, given the epicenter of the crisis within the credit market. In this paper, an in-depth analysis of airlines’ CDS spreads is conducted. It is found that they were severely hit, for all airlines studied. However, the results of the PSY test showed that speculative trading led the surge, as explosive roots were found in the spreads of all these aviation firms. The dramatic increase in CDS spreads has contributed to already high borrowing costs for airlines. Our results suggest that aviation bail outs have helped to mitigate spreads’ explosiveness. Monetary policy measures have also limited, albeit indirectly, the funding risk posed by the government bail outs. By the end of March 2021, spreads were no longer explosive, and were approaching, at highly heterogeneous paces, their pre-pandemic values. Notwithstanding, airlines’ stock prices have been notably resistant to recovery.

Keywords: COVID-19; airlines; bail outs; competition law; credit default swaps; fiscal policy; monetary policy (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2024
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