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Estimation of time-varying kernel densities and chronology of the impact of COVID-19 on financial markets

Author

Listed:
  • Matthieu Garcin

    (Research Center - Léonard de Vinci Pôle Universitaire - De Vinci Research Center)

  • Jules Klein
  • Sana Laaribi

Abstract

The time-varying kernel density estimation relies on two free parameters: the bandwidth and the discount factor. We propose to select these parameters so as to minimize a criterion consistent with the traditional requirements of the validation of a probability density forecast. These requirements are both the uniformity and the independence of the so-called probability integral transforms, which are the forecast time-varying cumulated distributions applied to the observations. We thus build a new numerical criterion incorporating both the uniformity and independence properties by the mean of an adapted Kolmogorov-Smirnov statistic. We apply this method to financial markets during the COVID-19 crisis. We determine the time-varying density of daily price returns of several stock indices and, using various divergence statistics, we are able to describe the chronology of the crisis as well as regional disparities. For instance, we observe a more limited impact of COVID-19 on financial markets in China, a strong impact in the US, and a slow recovery in Europe.

Suggested Citation

  • Matthieu Garcin & Jules Klein & Sana Laaribi, 2022. "Estimation of time-varying kernel densities and chronology of the impact of COVID-19 on financial markets," Working Papers hal-02901988, HAL.
    • Handle: RePEc:hal:wpaper:hal-02901988
    Note: View the original document on HAL open archive server: https://hal.science/hal-02901988v2
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    References listed on IDEAS

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    Cited by:

    1. Ayoub Ammy-Driss & Matthieu Garcin, 2021. "Efficiency of the financial markets during the COVID-19 crisis: time-varying parameters of fractional stable dynamics," Working Papers hal-02903655, HAL.

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