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The Asymmetric Effect of COVID-19 Pandemic on the US Market Risk Premium: Evidence from AEGAS-M Model

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  • François Benhmad

    (Montpellier University)

  • Mohamed Chikhi

    (University of Ouargla)

Abstract

In this paper, we introduce a new conditional volatility model (AEGAS-M) to analyze the impact of COVID-19 on US stock markets volatility and especially on risk premium of Dow Jones and SP500 both over the pre-Covid and during the Covid periods. The development of the AEGAS-M (Asymmetric exponential generalized autoregressive score in mean) model is based upon the stylized fact that investors demand a higher risk premium during ‘‘bad’’ volatility periods rather that during ‘‘good’’ ones. The results of the paper suggest that the AEGAS-M not only could capture stylized fact of volatility (jumps, leverage effect, persistence..), but also accommodate both skewness and the excess kurtosis in the US Stock markets returns distribution. Moreover, following a financial shock (like Covid-19 pandemic), there is a huge increase in volatility of US stock returns leading to a rise in required rates of return which depressed current prices. Not only the Covid-19 pandemic had a positive impact on the volatility of the two US stock returns, but a significant leverage effet was found confirming an asymmetric relationship between risk premium and volatility changes.

Suggested Citation

  • François Benhmad & Mohamed Chikhi, 2025. "The Asymmetric Effect of COVID-19 Pandemic on the US Market Risk Premium: Evidence from AEGAS-M Model," Computational Economics, Springer;Society for Computational Economics, vol. 66(2), pages 1691-1713, August.
    • Handle: RePEc:kap:compec:v:66:y:2025:i:2:d:10.1007_s10614-024-10745-8
    DOI: 10.1007/s10614-024-10745-8
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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