US and European Stock Markets in Response to Exogenous Shocks: Cross-Regional Analysis of Dynamic Networks During the COVID-19 Pandemic

Abstract

This study aims to analyse the impact of force majeure events or exogenous shocks, characterized by a high level of uncertainty, on the US and European stock market behaviour through cross-regional and inter-industrial comparisons. Based on the sample of 832 largest stock-listed companies publicly traded in both regions, the authors investigate whether specific regional and industrial differences in the stock market reaction to exogenous shocks—as exemplified by the ongoing COVID-19 pandemic—and their recovery paths to be determined. The novelty of the research conducted by the authors is underpinned by the application of a dynamic network analysis method—supported by the exponential random graph modelling—for a data sample of publicly traded companies, encompassing major players and industrial leaders in both regions. Furthermore, the methods are applied quarterly for an identical set of industries in cross-market comparison, within a time span of periods before, during and beyond the exogenous shock. The results reveal significant differences in the reaction of US and European stock markets to exogenous shocks, despite globally integrated financial markets. The connectivity of the largest listed companies on the US market is higher than the European ones. Thus, publicly traded companies in the United States are more likely to be closely connected to their industry peers. As demonstrated by a cross-market comparison of the European and US stock market network configuration, the US network reveals higher probabilities of intra-industrial connections of its market participants. In contrast, the European stock market exhibits fewer connections and a less dense network of market participants in times of uncertainty or exogenous shocks. Except for the European financial industry, which behaves similarly to its US counterpart, the overall interconnectedness of European companies is weaker within the uncertainty-related timespan. The latest could be partially explained by numerous national regulations being implemented at a country level, which are partly deviating from the EU single-market policies. In contrast to a relatively homogeneous setting of the US market, a low level of interconnectedness of publicly traded companies in Europe could be further argued by the application of non-harmonized industrial policies, with the latest being expanded during the ongoing crisis in selected European locations. This difference could also be explained by the absence of a mutual strategy for alleviating the effects of the COVID-19 pandemic in Europe. The obtained results could be valuable for academics, conducting similar thematic research; for portfolio investors, and policymakers in forecasting, reacting and assessing stock market behaviour overall—and at the level of industrial sectors in particular—in response to events characterized as force majeure, exogenous shocks or periods of uncertainty.