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Time-varying effects of the COVID-19 pandemic on stock markets and economic activity: evidence from the US and Europe

Author

Listed:
  • Guglielmo Maria Caporale

    (Brunel University London)

  • Abdurrahman Nazif Çatık

    (Ege University)

  • Mohamad Husam Helmi

    (Rabdan Academy)

  • Coşkun Akdeniz

    (Tekirdağ Namık Kemal University)

  • Ali İlhan

    (Tekirdağ Namık Kemal University)

Abstract

This paper examines the effects of the COVID-19 pandemic on CDS, stock returns, and economic activity in the US and the five European countries that have been most affected: the UK, Germany, France, Italy, and Spain. The sample period covers the period from 11 March 2020 to 19 February 2021. In the empirical analysis, first, we estimate benchmark linear VAR models and then, given the evidence of parameter instability, TVP-VAR models with stochastic volatility, which are ideally suited to capturing the changing dynamics in both financial markets and the real economy. The linear VAR responses of CDS to the number of COVID-19 cases are positive and statistically significant, whilst those of electricity consumption are insignificant and those of stock returns vary across countries in terms of their sign and significance. The results from the TVP-VAR analysis indicate that the effects of shocks on the system variables was more pronounced during the initial stages of the pandemic and then decreased in the following months. Specifically, there was a positive impact of the number of COVID-19 cases on CDS and a negative one on stock returns and economic activity, the latter two being interlinked.

Suggested Citation

  • Guglielmo Maria Caporale & Abdurrahman Nazif Çatık & Mohamad Husam Helmi & Coşkun Akdeniz & Ali İlhan, 2024. "Time-varying effects of the COVID-19 pandemic on stock markets and economic activity: evidence from the US and Europe," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 51(2), pages 529-558, May.
    • Handle: RePEc:kap:empiri:v:51:y:2024:i:2:d:10.1007_s10663-024-09608-0
    DOI: 10.1007/s10663-024-09608-0
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    More about this item

    Keywords

    COVID-19; Stock markets; Economic activity; CDS; 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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