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Local versus global factors weighing on stock market returns during the COVID-19 pandemic

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  • Dragomirescu-Gaina, Catalin
  • Philippas, Dionisis

Abstract

We use stock market returns and a new, weekly available, GDP tracker to estimate a structural VAR identified with long-run restrictions. We find that global ‘news’ contribute more than local ‘news’ shocks to explaining the recent variance of equity returns from developing and small developed countries. Since data do not (yet) point to an increase in financial integration during the current pandemic, our investigations support the alternative that these markets hold too optimistic views on their prospects and future ties with the global economy.

Suggested Citation

  • Dragomirescu-Gaina, Catalin & Philippas, Dionisis, 2022. "Local versus global factors weighing on stock market returns during the COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 46(PA).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pa:s1544612321003123
    DOI: 10.1016/j.frl.2021.102270
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    References listed on IDEAS

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    1. Bolboaca Maria & Fischer Sarah, 2021. "Unraveling News: Reconciling Conflicting Evidence," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(2), pages 695-743, June.
    2. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
    3. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
    4. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
    5. Alter, Adrian & Beyer, Andreas, 2014. "The dynamics of spillover effects during the European sovereign debt turmoil," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 134-153.
    6. Ryan Chahrour & Kyle Jurado, 2018. "News or Noise? The Missing Link," American Economic Review, American Economic Association, vol. 108(7), pages 1702-1736, July.
    7. Philippas, Dionisis & Dragomirescu-Gaina, Catalin, 2016. "Exposing volatility spillovers: A comparative analysis based on vector autoregressive models," Finance Research Letters, Elsevier, vol. 18(C), pages 302-305.
    8. Ric Colacito & Max Croce & Steven Ho & Philip Howard, 2018. "BKK the EZ Way: International Long-Run Growth News and Capital Flows," American Economic Review, American Economic Association, vol. 108(11), pages 3416-3449, November.
    9. Borgioli, Stefano & Horn, Carl-Wolfram & Kochanska, Urszula & Molitor, Philippe & Mongelli, Francesco Paolo, 2020. "European financial integration during the COVID-19 crisis," Economic Bulletin Articles, European Central Bank, vol. 7.
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    More about this item

    Keywords

    Structural VAR; ‘news’ shocks; Financial integration;
    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
    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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