Abstract
This chapter investigates how the financial markets react to the coronavirus outbreak by utilizing an event-study approach. We consider several news-based positive and negative COVID-19 events and their impact on emerging vs. developed markets and major asset classes. We examine the impact of COVID-19 events on the implied volatility of the global financial system, which is strongly observed in March 2020. Even during black swan events, we observe the asymmetric impact of coronavirus outbreaks across assets and markets. The response of black swan events generates a pronounced investor reaction. We also observe the role of ‘Animal Spirits’ through ‘Narrow Framing’ as investors seem to consider the pandemic as short-term shocks.
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Notes
- 1.
The number of regimes is decided based on the appropriate lag structure, statistical criteria, and the diagnostic results of results. We have considered two regime MS-DR models for our analysis.
- 2.
To conserve space, we have reported the January and February results in Appendix (Table 3).
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Acknowledgements
The study was presented at the ‘Virtual Conference on International Macroeconomics and Finance’ in the honor of ‘Prof. Bandi Kamaiah.’ We are thankful to ‘Naoyuki Yoshino’ for insightful suggestions. We are also thankful to Gazi Salah Uddin and Stelios Bekiros for their comments and suggestions on the first draft of this paper. The authors would like to acknowledge the DST-SERB (grant # MTR/2019/001035) for their generous financial support.
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Ahmad, W., Gupta, S., Rais, S. (2022). Understanding the Impact of COVID-19 on Financial Markets: Animal Spirits or Black Swan?. In: Yoshino, N., Paramanik, R.N., Kumar, A.S. (eds) Studies in International Economics and Finance. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-16-7062-6_31
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