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Direct and Indirect Effects of COVID-19 Pandemic on Implied Stock Market Volatility: Evidence from Panel Data Analysis

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  • Papadamou, Stephanos
  • Fassas, Athanasios
  • Kenourgios, Dimitris
  • Dimitriou, Dimitrios

Abstract

We investigate the effects of a google trend synthetic index concerning corona virus, as a composite indicator of searching term and theme, on the implied volatility of thirteen major stock markets, covering Europe, Asia, USA and Australia regions by using panel data analysis along with several model specifications and robustness tests. Increased search queries for COVID-19 not only have a direct effect on implied volatility, but also have an indirect effect via stock returns highlighting a risk-aversion channel operating over pandemic conditions. We show that these direct and indirect effects are stronger in Europe relative to the rest of the world. Moreover, in a PVAR framework, a positive shock on stock returns may calm down google searching about COVID-19 in Europe. Our findings suggest that google based anxiety about COVID-19 contagion effects leads to elevated risk-aversion in stock markets. Understanding the links between investors’ decision over a pandemic crisis and asset prices variability is critical for understanding the policy measures needed in markets and economies.

Suggested Citation

  • Papadamou, Stephanos & Fassas, Athanasios & Kenourgios, Dimitris & Dimitriou, Dimitrios, 2020. "Direct and Indirect Effects of COVID-19 Pandemic on Implied Stock Market Volatility: Evidence from Panel Data Analysis," MPRA Paper 100020, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:100020
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    More about this item

    Keywords

    COVID-19 pandemic; google trends; implied volatility; stock returns; panel data;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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