Macro‐financial linkages in the high‐frequency domain: Economic fundamentals and the Covid‐induced uncertainty channel in US and UK financial markets

This article contributes to our understanding of the macro‐financial linkages in the high‐frequency domain during the recent health crisis. Building on the extant literature that mainly uses monthly or quarterly macro proxies, we examine the daily economic impact on intra‐daily financial volatility by applying the macro‐augmented HEAVY model with asymmetries and power transformations. Our study associates US and UK financial with macroeconomic uncertainties in addition to further macro drivers that exacerbate equity market volatility. Daily local economic policy uncertainty is one of the main drivers of financial volatility, alongside global credit and commodity factors. Higher macro uncertainty is found to increase the leverage and macro effects from credit and commodity markets on US and UK stock market realized volatility. Most interestingly, the Covid‐19 outbreak is found to exert a considerable impact on financial volatilities through the uncertainty channel, given the prevalent worry about controversial policy interventions to support societies and markets, particularly in the case of the severely censured US and UK governments' reluctant and limited response in the very beginning of the pandemic.