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Comparing Risk Profiles of International Stock Markets as Functional Data: COVID-19 versus the Global Financial Crisis

Author

Listed:
  • Ryan Shackleton

    (Department of Information Technology, University of Pretoria, Pretoria, South Africa)

  • Sonali Das

    (Department of Business Management, University of Pretoria, Pretoria, South Africa)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

Abstract

In this paper, we aim to provide a detailed econometric analysis of the realised volatility in international stock markets of Brazil, China, Europe, India, the United Kingdom, and the United States, which represent a mix of large developing, and developed markets. For our purpose, we use the Functional Data Analysis (FDA) framework, whence discrete volatility data were first transformed into continuous functions, and thereafter, derivatives of the continuous functions were investigated, and kinetic and potential energy associated is the volatility system were extracted. Results revealed that COVID-19 indeed had a significant effect on international financial market volatility for all the countries, with the exception of China. Therealised volatility of the international financial markets did return to their pre-COVID levels in May 2020, and this recovery time was significantly faster than the 2008 financial crisis recovery period. Within the FDA framework, we further investigated the role of uncertainty on the realised volatility, specifically from an outbreak of an infectious disease (such as COVID-19) and a daily newspaper-based infectious disease index as the predictor. The regression analysis showed that the volatility of financial markets can be accurately modelled by this infectious disease index, but only for periods experiencing an epidemic or pandemic.

Suggested Citation

  • Ryan Shackleton & Sonali Das & Rangan Gupta, 2023. "Comparing Risk Profiles of International Stock Markets as Functional Data: COVID-19 versus the Global Financial Crisis," Working Papers 202328, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202328
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    References listed on IDEAS

    as
    1. Ole E. Barndorff‐Nielsen & Neil Shephard, 2002. "Econometric analysis of realized volatility and its use in estimating stochastic volatility models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(2), pages 253-280, May.
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    5. Mr. Stijn Claessens & Mr. Luc Laeven & Ms. Deniz O Igan & Mr. Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications from the Global Financial Crisis," IMF Working Papers 2010/044, International Monetary Fund.
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    More about this item

    Keywords

    Realised volatility; International stock markets; Functional data analysis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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