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Linking Covid-19 epidemic and emerging market OAS: Evidence using dynamic copulas and Pareto distributions

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Abstract

This paper investigates the dependence of the Option-Adjusted Spread (OAS) for several ICE BofA Emerging Markets Corporate Plus Indexes to the outbreaks of the Covid-19 viral pandemics between March 1, 2020, and April 30, 2021. We investigate whether the number of new cases, the reproduction rate, death rate and stringency policies have resulted in an increase/decrease in the spreads. We study the bivariate distributions of epidemiological indicators and spreads to investigate their concordance using dynamic copula analysis and estimate the Kendall rankcorrelation coefficient. We also investigate the effect of the epidemiological variables on the extreme values of the spreads by fitting a tail index derived from a Pareto type I distribution. We highlight the existence of correlations, robust to the type of copulas used (Clayton or Gumbel). Moreover, we show that the epidemiological variables explain well the extreme values of the spreads.

Suggested Citation

  • Imdade Chitou & Gilles Dufrénot & Julien Esposito, 2021. "Linking Covid-19 epidemic and emerging market OAS: Evidence using dynamic copulas and Pareto distributions," AMSE Working Papers 2138, Aix-Marseille School of Economics, France.
    • Handle: RePEc:aim:wpaimx:2138
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    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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