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Risk Spillover during the COVID-19 Global Pandemic and Portfolio Management

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  • Mohamed Yousfi

    (High Commercial Studies Institute, University of Sousse, Sousse 4000, Tunisia)

  • Abderrazak Dhaoui

    (LaREMFiQ, High Commercial Studies Institute, University of Sousse, Sousse 4000, Tunisia
    Ipag Business School (IPAG Lab), 184 Boulevard Saint-Germain, 75006 Paris, France)

  • Houssam Bouzgarrou

    (Higher Institute of Finance and Taxation, University of Sousse, Sousse 4000, Tunisia)

Abstract

This paper aims to examine the volatility spillover, diversification benefits, and hedge ratios between U.S. stock markets and different financial variables and commodities during the pre-COVID-19 and COVID-19 crisis, using daily data and multivariate GARCH models. Our results indicate that the risk spillover has reached the highest level during the COVID-19 period, compared to the pre-COVID period, which means that the COVID-19 pandemic enforced the risk spillover between U.S. stock markets and the remains assets. We confirm the economic benefit of diversification in both tranquil and crisis periods (e.g., a negative dynamic conditional correlation between the VIX and SP500). Moreover, the hedging analysis exhibits that the Dow Jones Islamic has the highest hedging effectiveness either before or during the recent COVID19 crisis, offering better resistance to uncertainty caused by unpredictable turmoil such as the COVID19 outbreak. Our finding may have some implications for portfolio managers and investors to reduce their exposure to the risk in their portfolio construction.

Suggested Citation

  • Mohamed Yousfi & Abderrazak Dhaoui & Houssam Bouzgarrou, 2021. "Risk Spillover during the COVID-19 Global Pandemic and Portfolio Management," JRFM, MDPI, vol. 14(5), pages 1-29, May.
    • Handle: RePEc:gam:jjrfmx:v:14:y:2021:i:5:p:222-:d:554950
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