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Impact of COVID-19 on Stock Indices Volatility: Long-Memory Persistence, Structural Breaks, or Both?

Author

Listed:
  • Abdinardo Moreira Barreto Oliveira

    (Federal University of Technology of Paraná)

  • Anandadeep Mandal

    (University of Birmingham)

  • Gabriel J. Power

    (Université Laval)

Abstract

The onset of the COVID-19 pandemic has increased volatility in financial markets, motivating researchers to investigate its impact. Some use the GARCH family of models to focus on long-memory persistence, while others use Markov chain models to better identify structural breaks and regimes. However, no study has addressed the occurrence of these two phenomena in a unified framework. Since both are important features of the data, to ignore one or the other could lead to poorly specified models. The outcome would be incorrect risk measurement, with implications for risk management, Value at risk, portfolio decisions, forecasting, and option pricing. This paper aims to fill this gap in the literature. We assemble an international dataset for 16 stock market indices in three continents over the period from August 1, 2019 to February 18, 2022, totalling 669 business days. Using R, we estimate 80 GARCH family models, 16 pure Markov-Switching models, and 900 combined GARCH/ Markov-Switching models using daily stock market log-returns. We allow for two volatility regimes (low and high). We also measure and incorporate News Impact Curves, which show how past shocks affect contemporaneous volatility. Our main finding, across estimated models, is that COVID-19 affected both long-memory persistence and volatility regimes in most markets. To describe the specific impact in each market, we report News Impact Curves. Lastly, the first wave of COVID-19 had a much greater impact on volatility than did subsequent waves linked to the emergence of new variants.

Suggested Citation

  • Abdinardo Moreira Barreto Oliveira & Anandadeep Mandal & Gabriel J. Power, 2024. "Impact of COVID-19 on Stock Indices Volatility: Long-Memory Persistence, Structural Breaks, or Both?," Annals of Data Science, Springer, vol. 11(2), pages 619-646, April.
  • Handle: RePEc:spr:aodasc:v:11:y:2024:i:2:d:10.1007_s40745-022-00446-0
    DOI: 10.1007/s40745-022-00446-0
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