Return Connectedness across Asset Classes around the COVID-19 Outbreak

Elie Bouri (), Oguzhan Cepni, David Gabauer and Rangan Gupta

No 202047, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we show evidence of a dramatic change in the structure and time-varying patterns of return connectedness across various assets (gold, crude oil, world equities, currencies, and bonds) around the COVID-19 outbreak. Using the TVP-VAR connectedness approach, the results show that the dynamic total connectedness across the five assets was moderate and quite stable until early 2020. After that, the total connectedness spikes and the structure of the network of connectedness alters, which concurs with the COVID-19 outbreak. The equity and USD indices are the primary transmitters of shocks before the outbreak, whereas the bond index becomes the main transmitters of shocks during the COVID-19 outbreak. However, the USD index is a net receiver of shocks to other assets during the outbreak period. Furthermore, using a recently developed newspaper-based index of uncertainty in financial markets due to infectious diseases to capture the recent impact of Covid-19, we find that connectedness is positively related to this index, and increases at higher levels (conditional quantiles) of connectedness. Overall, our results reflect the speedy disturbing effects of the COVID-19 outbreak, which matters to the formulations of policies seeking to achieve financial stability. The results also indicate a possibility to threaten investors' portfolios and fade the benefits of diversification.

Keywords: COVID-19 outbreak; financial markets contagion; return connectedness; TVP-VAR (search for similar items in EconPapers)
JEL-codes: C32 C5 F3 G15 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2020-05
New Economics Papers: this item is included in nep-net
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Citations: View citations in EconPapers (27)

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Journal Article: Return connectedness across asset classes around the COVID-19 outbreak (2021)
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