Comparing Risk Profiles of International Stock Markets as Functional Data: COVID-19 versus the Global Financial Crisis

Ryan Shackleton, Sonali Das () and Rangan Gupta
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Ryan Shackleton: Department of Information Technology, University of Pretoria, Pretoria, South Africa
Sonali Das: Department of Business Management, University of Pretoria, Pretoria, South Africa

No 202328, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we aim to provide a detailed econometric analysis of the realised volatility in international stock markets of Brazil, China, Europe, India, the United Kingdom, and the United States, which represent a mix of large developing, and developed markets. For our purpose, we use the Functional Data Analysis (FDA) framework, whence discrete volatility data were first transformed into continuous functions, and thereafter, derivatives of the continuous functions were investigated, and kinetic and potential energy associated is the volatility system were extracted. Results revealed that COVID-19 indeed had a significant effect on international financial market volatility for all the countries, with the exception of China. Therealised volatility of the international financial markets did return to their pre-COVID levels in May 2020, and this recovery time was significantly faster than the 2008 financial crisis recovery period. Within the FDA framework, we further investigated the role of uncertainty on the realised volatility, specifically from an outbreak of an infectious disease (such as COVID-19) and a daily newspaper-based infectious disease index as the predictor. The regression analysis showed that the volatility of financial markets can be accurately modelled by this infectious disease index, but only for periods experiencing an epidemic or pandemic.

Keywords: Realised volatility; International stock markets; Functional data analysis (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 C53 G15 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2023-09
New Economics Papers: this item is included in nep-cna
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:202328

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