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Return connectedness across asset classes around the COVID-19 outbreak

Author

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  • Bouri, Elie
  • Cepni, Oguzhan
  • Gabauer, David
  • Gupta, Rangan

Abstract

In this paper, we show evidence of a dramatic change in the structure and time-varying patterns of return connectedness across various assets (gold, crude oil, world equities, currencies, and bonds) around the COVID-19 outbreak. Using the TVP-VAR connectedness approach, the results show that the dynamic total connectedness across the five assets was moderate and quite stable until early 2020. After that, the total connectedness spikes and the structure of the network of connectedness alters, which concurs with the COVID-19 outbreak. The equity and USD indices are the primary transmitters of shocks before the outbreak, whereas the bond index becomes the main transmitters of shocks during the COVID-19 outbreak. However, the USD index is a net receiver of shocks to other assets during the outbreak period. Furthermore, using a recently developed newspaper-based index of uncertainty in financial markets due to infectious diseases to capture the recent impact of COVID-19, we find that connectedness is positively related to this index, and increases at higher levels (conditional quantiles) of connectedness. Overall, our results reflect the speedy disturbing effects of the COVID-19 outbreak, which matters to the formulations of policies seeking to achieve financial stability. The results also indicate a possibility to threaten investors’ portfolios and fade the benefits of diversification.

Suggested Citation

  • Bouri, Elie & Cepni, Oguzhan & Gabauer, David & Gupta, Rangan, 2021. "Return connectedness across asset classes around the COVID-19 outbreak," International Review of Financial Analysis, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:finana:v:73:y:2021:i:c:s1057521920302878
    DOI: 10.1016/j.irfa.2020.101646
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    More about this item

    Keywords

    COVID-19 outbreak; Financial markets contagion; Return connectedness; TVP-VAR;
    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
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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