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Direct and Indirect Effects of COVID-19 Pandemic on Implied Stock Market Volatility: Evidence from Panel Data Analysis

Stephanos Papadamou, Athanasios Fassas, Dimitris Kenourgios () and Dimitrios Dimitriou ()

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate the effects of a google trend synthetic index concerning corona virus, as a composite indicator of searching term and theme, on the implied volatility of thirteen major stock markets, covering Europe, Asia, USA and Australia regions by using panel data analysis along with several model specifications and robustness tests. Increased search queries for COVID-19 not only have a direct effect on implied volatility, but also have an indirect effect via stock returns highlighting a risk-aversion channel operating over pandemic conditions. We show that these direct and indirect effects are stronger in Europe relative to the rest of the world. Moreover, in a PVAR framework, a positive shock on stock returns may calm down google searching about COVID-19 in Europe. Our findings suggest that google based anxiety about COVID-19 contagion effects leads to elevated risk-aversion in stock markets. Understanding the links between investors’ decision over a pandemic crisis and asset prices variability is critical for understanding the policy measures needed in markets and economies.

Keywords: COVID-19 pandemic; google trends; implied volatility; stock returns; panel data (search for similar items in EconPapers)
JEL-codes: C33 D83 G12 G14 (search for similar items in EconPapers)
Date: 2020-05-02
New Economics Papers: this item is included in nep-fmk and nep-rmg
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