Stock Market Responses to COVID-19: The Behaviors of Mean Reversion, Dependence and Persistence

Yener, Coskun and Akinsomi, Omokolade and Gil-Alana, Luis A. and Yaya, OlaOluwa S (2023): Stock Market Responses to COVID-19: The Behaviors of Mean Reversion, Dependence and Persistence. Published in: Heliyon

Abstract

We examine stock market responses during the COVID-19 pandemic period using fractional integration techniques. The evidence suggests that stock markets generally follow a synchronized movement before and the stages of the pandemic shocks. We find while mean reversion significantly declines, the degree of persistence and dependence has been increased in the majority of the stock market indices in whole sample analysis covering the period of 02.08.2019 and 09.07.2020. This outcome implies increasing integration and possibly declining benefits of diversification for the global stock portfolio management.

• Item Type: MPRA Paper
• Language: English
• Keywords: Coronavirus; stock markets; fractional integration; long memory; mean reversion.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes

References

Abuzayed, B., Bouri, E., Al-Fayoumi, N., & Jalkh, N. (2021). Systemic risk spillover across global and country stock markets during the COVID-19 pandemic. Economic Analysis and Policy, 71, 180-197.

Akhtaruzzaman, M., Boubaker, S., & Sensoy, A. (2020). Financial contagion during COVID–19 crisis. Finance Research Letters, 101604. https://www.sciencedirect.com/science/article/pii/S1544612320305754

Al-Awadhi, A.M., Al-Saifi, K., Al-Awadhi, A. and Alhamadi, S., 2020. Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance, p.100326.

Ashraf, B. N. (2020). Stock markets’ reaction to COVID-19: cases or fatalities? Research in International Business and Finance, 101249.

Baker, S. R., Bloom, N., Davis, S. J., Kost, K. J., Sammon, M. C., & Viratyosin, T. (2020). The unprecedented stock market impact of COVID-19 (No. w26945). National Bureau of Economic Research.

Baker, S., Bloom, N., Davis, S. J., Kost, K., Sammon, M., & Viratyosin, T. (2020). The unprecedented stock market reaction to COVID-19. COVID Economics: Vetted and Real-Time Papers, 1(3). https://marcosammon.com/images/StockMarkets_COVID.pdf

Barro, R. J., Ursúa, J. F., & Weng, J. (2020). The coronavirus and the great influenza pandemic: Lessons from the “spanish flu” for the coronavirus’s potential effects on mortality and economic activity (No. w26866). National Bureau of Economic Research.

Bloomfield, P. (1973). An exponential model in the spectrum of a scalar time series. Biometrika, 60, 217-226.

Bouri, E., Demirer, R., Gupta, R., & Nel, J. (2021). COVID-19 pandemic and investor herding in international stock markets. Risks, 9(9), 168.

Caporale, G. M. & Gil-Alana, L. A. (2009) A multivariate long memory model with structural breaks, Journal of Statistical Computation and Simulation, 79:8, 1001-1013, DOI: 10.1080/00949650802087011

Caporale, G. M., Gil-Alana, L., & Plastun, A. (2018). Persistence in the cryptocurrency market. Research in International Business and Finance, 46, 141-148.

Chen, M.-P.; Lee, C.-C.; Lin, Y.-H.; Chen,W.-Y. (2018). Did the S.A.R.S. epidemic weaken the integration of Asian stock markets? Evidence from smooth time-varying cointegration analysis. Econ. Res. Ekonomska Istraživanja, 31: 908–926.

Chetty, R., J. N., Friedman, N. Hendren, M. Stepner, and the Opportunity Insights Team. 2020. “How Did COVID-19 and Stabilization Policies Affect Spending and Employment?” NBER Working Paper No. 27431, National Bureau of Economic Research, Cambridge, MA. https://www.nber.org/papers/w27431.

Cheng, T., Liu, J., Yao, W., & Zhao, A. B. (2022). The impact of COVID-19 pandemic on the volatility connectedness network of global stock market. Pacific-Basin Finance Journal, 71, 101678.

Cuestas J.C. and L.A. Gil-Alana (2016). “A Non-Linear Approach with Long Range Dependence Based on Chebyshev Polynomials”, Studies in Nonlinear Dynamics and Econometrics, 23, 445–468.

Geweke, J. and S. Porter-Hudak (1983), The estimation and application of long memory time series models. Journal of Time Series Analysis, 4 (1983), pp. 221-238

Giglio, S., Maggiori, M., Stroebel, J., & Utkus, S. (2020). Inside the Mind of a Stock Market Crash. arXiv preprint arXiv:2004.01831.

Gil-Alana, L. A. (2001). A fractionally integrated exponential model for UK unemployment. Journal of Forecasting, 20(5), 329–340. doi:10.1002/for.790

Gil-Alana, L. A., & Payne, J. E. (2020). Measuring the degree of persistence in the US economic policy uncertainty index. Applied Economics Letters, 27(10), 831-835.

Gil-Alana, L.A. and O. Yaya (2021), Testing fractional unit roots with non-linear smooth break approximations using Fourier functions, Journal of Applied Statistics 48, 13-15, 2542-2559

Goodell, J. W. (2020). COVID-19 and finance: Agendas for future research. FinanceResearch Letters. https://doi.org/10.1016/j.frl.2020.101512.

Gormsen, N.J., Koijen, R.S., 2020. Coronavirus: Impact on Stock Prices and Growth Expectations. University of Chicago, Becker Friedman Institute for Economics Working Paper, (2020-22).

Granger, C.W.J. (1980), Long memory relationships and the aggregation of dynamic models, Journal of Econometrics, 14, 227-238.

Granger, C. W. J. and Joyeux, R. 1980. An introduction to long memory time series and fractional differencing. Journal of Time Series Analysis. 1, 15–29. doi:10.1111/j.1467-9892.1980.tb00297.x

Haroon, O., & Rizvi, S. A. R. (2020). COVID-19: Media coverage and financial markets behavior—A sectoral inquiry. Journal of Behavioral and Experimental Finance, 100343.

Haroon, O., & Rizvi, S. A. R. (2020). COVID-19: Media coverage and financial markets behavior—A sectoral inquiry. Journal of Behavioral and Experimental Finance, 100343. https://www.sciencedirect.com/science/article/pii/S0925753520303210

Hosking, J.R.M. (1981) Fractional differencing, Biometrika 68, 165-176.

Igan, D., Kirti, D. and Martinez, S. (2020). Peria1The Disconnect between Financial Markets and the Real Economy. Special Notes Series on COVID-19. August 26. IMF.

IMF. (2020). Global Financial Stability Report: Bridge to Recovery. October. Available at: https://www.imf.org/ en/Publications/GFSR/Issues/2020/10/13/global-financial-stability-report-october-2020#Chapter2 (accessed on: 24.10.2020)

Li, W., Chien, F., Kamran, H. W., Aldeehani, T. M., Sadiq, M., Nguyen, V. C., & Taghizadeh-Hesary, F. (2022). The nexus between COVID-19 fear and stock market volatility. Economic research-Ekonomska istraživanja, 35(1), 1765-1785.

Liu, H., Manzoor, A., Wang, C., Zhang, L., & Manzoor, Z. (2020). The COVID-19 outbreak and affected countries stock markets response. International Journal of Environmental Research and Public Health, 17(8), 2800.

McKibbin, W.J. and Fernando, R., 2020. The global macroeconomic impacts of COVID-19: Seven scenarios.

Nippani, S., & Washer, K. M. (2004). S.A.R.S.: A non-event for affected countries’ stock markets? Applied Financial Economics, 14(15), 1105–1110.

Phan, D.H.B., Sharma, S., Narayan, P.K., 2015a. Intraday volatility interaction between the crude oil and equity markets. J. Int. Financ. Mark. Inst. Money 40, 1–13.

Phan, D.H.B., Sharma, S., Narayan, P.K., 2015b. Stock return forecasting: some new evidence. Int. Rev. Financ. Anal. 40, 38–51.

Rakshit, B., & Neog, Y. (2022). Effects of the COVID-19 pandemic on stock market returns and volatilities: evidence from selected emerging economies. Studies in Economics and Finance, 39(4), 549-571.

Rizvi, S. A. R., & Arshad, S. (2018). Understanding time-varying systematic risks in Islamic and conventional sectoral indices. Economic Modelling, 70, 561-570.

Robinson, P.M. (1994). Efficient tests of nonstationary hypotheses. Journal of the American Statistical Association, 89, 1420-1437.

Santamaria, L., & Hortal, J. (2020). Chasing the ghost of infection past: identifying thresholds of change during the COVID-19 infection in Spain. medRxiv. https://www.medrxiv.org/content/10.1101/2020.04.09.20059345v3.full.pdf

Seligmann, H., Iggui, S., Rachdi, M., Vuillerme, N., & Demongeot, J. (2020). Inverted Covariate Effects for First versus Mutated Second Wave COVID-19: High Temperature Spread Biased for Young. Biology, 9(8), 226.

Sharif, A., Aloui, C. and Yarovaya, L., 2020. COVID-19 pandemic, oil prices, stock market, geopolitical risk and policy uncertainty nexus in the US economy: Fresh evidence from the wavelet-based approach. International Review of Financial Analysis, p.101496.

Sharif, A., Aloui, C., & Yarovaya, L. (2020). COVID-19 pandemic, oil prices, stock market, geopolitical risk and policy uncertainty nexus in the US economy: Fresh evidence from the wavelet-based approach. International Review of Financial Analysis, 101496.

Sowell, F. (1992), Maximum likelihood estimation of Stationary Univariate Fractionally Integrated Time Series Models, Journal of Econometrics, 53, 165-188. http://dx.doi.org/10.1016/0304-4076(92)90084-5

Topcu, M., & Gulal, O. S. (2020). The impact of COVID-19 on emerging stock markets. Finance Research Letters, 36, 101691.

UNCTAD. 2020. The Covid-19 shock to developing countries. UNCTAD Report, INF/2020/2. https://unctad.org/system/files/official-document/gds_tdr2019_covid2_en.pdf [accessed on 17.02.2023].

Velde, Francois, 2020. “What Happened to the US Economy During the 1918 Influenza Pandemic? A View Through High-Frequency Data,” Federal Reserve Bank of Chicago Working Paper 2020-11, 17 April.

Vittuari, M., M. Masotti, E. Lori, L. Falasconi, T. Toschi, and A. Segre. 2021. Does the COVID-19 external shock matter on household food waste? The impact of social distancing measures during the lockdown. Resources, Conservation and Recycling. 174, 105815.

Westerlund, J., & Narayan, P. (2015). Testing for predictability in conditionally heteroskedastic stock returns. Journal of Financial Econometrics, 13(2), 342-375.

Wieland, T. (2020). A phenomenological approach to assessing the effectiveness of COVID-19 related nonpharmaceutical interventions in Germany. Safety Science, 104924.

Yaya, O. S., Gil-Alana, L. A., Vo, X. V. and Adekoya, O. B. (2021). How fearful are Commodities and US stocks in response to Global fear? Persistence and Cointegration analyses. Resources Policy, Volume 74, 102273.

Yaya, O., Ogbonna, A.E., Gil-Alana, L.A. and Furuoka, F. (2021). A new unit root analysis for testing hysteresis in unemployment, Oxford Bulletin of Economics and Statistics 83(4), 960-981.

Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 101528.

Zhao, L., Rasoulinezhad, E. and Sarker, T. (2023). Effects of COVID‑19 on Global Financial Markets: Evidence from Qualitative Research for Developed and Developing Economies. The European Journal of Development Research (2023) 35:148–166