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The impact of COVID-19 pandemic on the volatility connectedness network of global stock market

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  • Cheng, Tingting
  • Liu, Junli
  • Yao, Wenying
  • Zhao, Albert Bo

Abstract

This paper investigates how the COVID-19 pandemic affects the connectedness network of stock market volatility in 19 economies around the world. Our method builds on the Diebold-Yilmaz volatility network model to construct the volatility spillover index, and uses lag sparse group LASSO to accommodate the high-dimensional system. We find that the outbreak of the COVID-19 pandemic strengthens the overall volatility connectedness, and the global connectedness level remains high throughout 2020. In particular, connections across different continents have become stronger during this period. However, China is shown to be disconnected from the global volatility connectedness network until late November 2020. We find evidence that China is not the main source of volatility spillover during the COVID-19 pandemic.

Suggested Citation

  • Cheng, Tingting & Liu, Junli & Yao, Wenying & Zhao, Albert Bo, 2022. "The impact of COVID-19 pandemic on the volatility connectedness network of global stock market," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:pacfin:v:71:y:2022:i:c:s0927538x21001852
    DOI: 10.1016/j.pacfin.2021.101678
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    2. Yousaf, Imran & Hunjra, Ahmed Imran & Alshater, Muneer M. & Bouri, Elie & Li, Yanshuang, 2023. "Multidimensional connectedness among the volatility of global financial markets around the Russian-Ukrainian conflict," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
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    4. Mei-jun, Ling & Guang-xi, Cao, 2024. "Dynamics of asymmetric multifractal cross-correlations between cryptocurrencies and global stock markets: Role of gold and portfolio implications," Chaos, Solitons & Fractals, Elsevier, vol. 182(C).
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    6. Masagus M. Ridhwan & Solikin M. Juhro & Affandi Ismail & Peter Nijkamp & Kelvin Ramadhan Hidayat, 2024. "Did COVID-19 Disrupt the Stock Market Return and Volatility? A Meta-Analytic Approach," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 27(1), pages 25-82, March.
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    8. Di, Michael & Xu, Ke, 2022. "COVID-19 vaccine and post-pandemic recovery: Evidence from Bitcoin cross-asset implied volatility spillover," Finance Research Letters, Elsevier, vol. 50(C).
    9. Nupur Moni Das & Bhabani Sankar Rout & Yashmin Khatun, 2023. "Does G7 Engross the Shock of COVID 19: An Assessment with Market Volatility?," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(4), pages 795-816, December.
    10. Yang, Jie & Feng, Yun, 2023. "Market inefficiency spillover network across different regimes," Finance Research Letters, Elsevier, vol. 58(PC).
    11. Al-Nassar, Nassar S. & Yousaf, Imran & Makram, Beljid, 2023. "Spillovers between positively and negatively affected service sectors from the COVID-19 health crisis: Implications for portfolio management," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    12. Yuan, Ying & Wang, Haiying & Jin, Xiu, 2022. "Pandemic-driven financial contagion and investor behavior: Evidence from the COVID-19," International Review of Financial Analysis, Elsevier, vol. 83(C).
    13. Xing, Shuo & Cheng, Tingting & Sun, Shuanglin, 2024. "Do investors herd under global crises? A comparative study between Chinese and the United States stock markets," Finance Research Letters, Elsevier, vol. 62(PA).
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    More about this item

    Keywords

    COVID-19; Network connectedness; Spillover index; Variance decomposition;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F3 - International Economics - - International Finance

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