Does US Infectious Disease Equity Market Volatility Index Predict G7 Stock Returns? Evidence Beyond Symmetry

Raheel Gohar (), Asma Salman, Emmanuel Uche (), Omer Faruk Derindag () and Bisharat Hussain Chang
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Raheel Gohar: College of Business Administration, Al Yamamah University, Riyadh, Saudi Arabia
Emmanuel Uche: ��Department of Economics, Abia State University, Uturu, Abia State, Nigeria
Omer Faruk Derindag: �Department of International Trade and Business, Inonu University, Battalgazi, Malatya, Turkey
Bisharat Hussain Chang: �Department of Business Administration, Sukkur IBA University, Sukkur, Pakistan

Annals of Financial Economics (AFE), 2023, vol. 18, issue 02, 1-16

Abstract: During the COVID-19 pandemic, Baker et al. (2020) [The unprecedented stock market reaction to COVID-19. The Review of Asset Pricing Studies, 10, 742–758.] proposed the infectious disease equity market volatility (ID-EMV) index, which tracks US equity market volatility caused by infectious diseases. We extended the literature by using this newly developed ID-EMV index to examine its asymmetric effect on the share market returns of the G7 countries, which include the United Kingdom, Italy, Japan, Germany, France, Canada, and the United States of America. Moreover, we used novel techniques like the quantile-on-quantile regression test, quantile cointegration test, and quantile unit root test. The quantile cointegration test indicates that the infectious disease EMV index is cointegrated with G7 stock returns. Moreover, the quantile-on-quantile regression technique reveals that the infectious disease index positively affects stock returns during bullish states of the stock markets. In contrast, it negatively affects stock returns during bearish states of the stock market returns. The negative effect of the bearish states implies that investors may discourage investments during the downturns of the economy, whereas they need to boost their investments during economic booms.

Keywords: Quantile cointegration; ID-EMV index; quantile-on-quantile regression; G7 stock markets (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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DOI: 10.1142/S2010495222500282

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