Shock Spillovers and Portfolio Resilience: The Role of Investor Sentiment in Times of Crises

Abstract

This study investigates the dynamic connectedness and portfolio implications across a diverse set of assets during the COVID-19 pandemic and the Russia–Ukraine conflict. Using a time-varying parameter VAR model and wavelet coherence analysis, the findings reveal that co-movement remained pronounced during the Russia–Ukraine conflict, with total connectedness increasing significantly compared to the pandemic. Moreover, a notable shift in risk transmission roles is observed: oil and gas transitioned from being net receivers of shocks during the pandemic to net transmitters during the conflict. From a portfolio management perspective, the Minimum Connectedness Portfolio outperformed alternative strategies across both crises, delivering the highest cumulative returns and the most robust recovery. These findings offer valuable insights to support more informed investment decisions and guide the development of effective policy responses.