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The role of the COVID-19 pandemic in US market volatility: Evidence from the VIX index

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  • Apergis, Nicholas
  • Mustafa, Ghulam
  • Malik, Shafaq

Abstract

We examine how the implied volatility in the US financial market has been affected by the COVID-19 pandemic. We decompose the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) into two implied volatility conditions (i.e., low and high), and COVID-19 pandemic cases and deaths into two categories (i.e., low and high). Our novel quantile-on-quantile regression approach allows us to better examine the dynamic relationship between the COVID-19 pandemic and implied volatility. Our empirical results show that increased death rates tend to increase fear in the US financial market. Specifically. we find that high COVID-19 cases have a significant impact on implied volatility under high uncertainty conditions, but low COVID-19 cases appear to have no impact on implied volatility in the US market. Our findings offer support to the US policy response by the Federal Reserve Board and the government to limit the instability effect of the COVID-19 shock on the financial markets.

Suggested Citation

  • Apergis, Nicholas & Mustafa, Ghulam & Malik, Shafaq, 2023. "The role of the COVID-19 pandemic in US market volatility: Evidence from the VIX index," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 27-35.
    • Handle: RePEc:eee:quaeco:v:89:y:2023:i:c:p:27-35
    DOI: 10.1016/j.qref.2023.03.004
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    More about this item

    Keywords

    VIX; COVID-19; Quantile-on-quantile regression; Forecasting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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