The effect of COVID-19 on volatility and spillover effects between major international stock indices.

Abstract

In 2020, COVID-19 was initially seen as an epidemic and evolved into an all-out pandemic. As a result, global economies across the globe were affected. This thesis explores the relationship between market turbulence across countries. It demonstrates the recent COVID-19 pandemic’s influence on the volatility and volatility spillover across six major stock indices: S&P 500, NASDAQ, Euronext 100, BSE Sensex, Nikkei 225, and Hang Seng Index. We estimated the pandemic effect on market volatility utilizing the generalized spillover index developed by Diebold & Yilmaz (2009, 2012) to explore the connectedness within these indices, and to explore the direction of the volatility spillovers across time. Our findings suggest a significant pandemic impact on market volatility and volatility spillover. The results further indicate that the S&P 500 is the most dominating contributor to volatility spillover among the six indices.

Our results contribute to previous literature seeking to understand the recent pandemic’s influence on capital markets and the negative consequences associated with markets being highly integrated. Furthermore, the findings add necessary information to hedgers and speculators concerning interdependence within these indices.