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The impact of the SARS-CoV-2 pandemic on financial markets: a seismologic approach

Author

Listed:
  • Alessandro Spelta

    (University of Pavia)

  • Nicolò Pecora

    (Catholic University)

  • Andrea Flori

    (Polytechnic of Milan)

  • Paolo Giudici

    (University of Pavia)

Abstract

This work investigates financial volatility cascades generated by SARS-CoV-2 related news using concepts developed in the field of seismology. We analyze the impact of socio-economic and political announcements, as well as of financial stimulus disclosures, on the reference stock markets of the United States, United Kingdom, Spain, France, Germany and Italy. We quantify market efficiency in processing SARS-CoV-2 related news by means of the observed Omori power-law exponents and we relate these empirical regularities to investors’ behavior through the lens of a stylized Agent-Based financial market model. The analysis reveals that financial markets may underreact to the announcements by taking a finite time to re-adjust prices, thus moving against the efficient market hypothesis. We observe that this empirical regularity can be related to the speculative behavior of market participants, whose willingness to switch toward better performing investment strategies, as well as their degree of reactivity to price trend or mispricing, can induce long-lasting volatility cascades.

Suggested Citation

  • Alessandro Spelta & Nicolò Pecora & Andrea Flori & Paolo Giudici, 2023. "The impact of the SARS-CoV-2 pandemic on financial markets: a seismologic approach," Annals of Operations Research, Springer, vol. 330(1), pages 639-664, November.
    • Handle: RePEc:spr:annopr:v:330:y:2023:i:1:d:10.1007_s10479-021-04115-y
    DOI: 10.1007/s10479-021-04115-y
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    Keywords

    SARS covid-2; Financial markets; Omori law; Agent-based modeling;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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