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Stock market returns, volatility, correlation and liquidity during the COVID-19 crisis: Evidence from the Markov switching approach

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  • Just, Małgorzata
  • Echaust, Krzysztof

Abstract

This paper investigates the relationship between US stock market returns (S&P500) and three indicators of the market, namely implied volatility, implied correlation and liquidity. It also considers the short range dependence between both total confirmed cases and deaths in twelve countries and market movements. We use the two-regime Markov switching model to find the structural break between stock market returns and key stock market indicators. The findings show close dependence between returns and both implied volatility and implied correlation but not with liquidity. The findings indicate the unique role of Italy in crisis transmission.

Suggested Citation

  • Just, Małgorzata & Echaust, Krzysztof, 2020. "Stock market returns, volatility, correlation and liquidity during the COVID-19 crisis: Evidence from the Markov switching approach," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612320315890
    DOI: 10.1016/j.frl.2020.101775
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    More about this item

    Keywords

    COVID-19; VIX; Implied correlation; Liquidity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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