Stock markets from COVID-19 to the Russia–Ukraine crisis: Structural breaks in interactive effects panels

Financial markets are frequently exposed to a variety of crises at the national, regional, and global levels, with potentially heterogeneous effects on market performance. To make sound investment and policy choices, investors and policymakers are constantly concerned about the market's behavior during such times of extreme stress. This article explores the impact of the two recent crises—the Russian–Ukraine war and the COVID-19 pandemic—on equity markets using Karavias et al.’s (2022) panel data approach and daily data from January 2020 to April 2022. Unlike conventional panel data models, this novel technique assesses the presence and location of common structural breaks across the studied countries while accommodating unobserved heterogeneity and panel dependency. We hypothesize that the conflict's impact on global equity markets is heterogeneous and based on countries' economic-political connection or proximity to the war zone, notably among sanctioning countries (the G7) and non-sanctioning countries (the Russia-China-India triple or RIC). Our results suggest that the G7's financial markets are more sensitive to country-specific macroeconomic factors and commodity price changes during extreme market stress than those of the RIC triad. Moreover, the war has a stronger influence on the G7 stock markets through commodity prices, with a greater impact of natural gas and wheat prices for this group. These findings are consistent with the fact that markets in developed economies with an extreme reliance on commodities are more sensitive to crises and international conflicts.