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The impact of COVID-19 on the relative market efficiency and forecasting ability of credit derivative and equity markets

Author

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  • Procasky, William J.
  • Yin, Anwen

Abstract

While there has been a significant amount of research related to COVID-19’s impact on financial markets, none has addressed the potential change in relative market efficiency and associated forecasting power of credit and equity markets. Accordingly, we examine the impact of COVID-19 on previously observed predictive power of cross-market informational flow in the high yield CDS and equity markets. Our analysis reveals that, a significant structural break occurred with the onset of COVID-19 in which both markets exhibited flow patterns distinct from those observed in the past. This indicates that investors reacted to the pandemic and new information coming to market differently than in the past. Moreover, we empirically link the structural break to governmental measures enacted to stabilize financial markets and economies. Finally, we observe that the break was more severe in the equity than CDS market, a finding consistent with the CDS market having an overall informational advantage.

Suggested Citation

  • Procasky, William J. & Yin, Anwen, 2023. "The impact of COVID-19 on the relative market efficiency and forecasting ability of credit derivative and equity markets," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923004428
    DOI: 10.1016/j.irfa.2023.102926
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    More about this item

    Keywords

    COVID-19; Market efficiency; Informational flow; Predictive power; Structural break; CDS indices;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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