A New Form of Financial Contagion: COVID-19 and Stock Market Responses

Abstract

The COVID-19 pandemic has induced a different and more severe version of the contagion phenomenon. In this study, we examine the influence of the COVID-19 pandemic on six different stock markets. Empirical analyses are conducted for four different time intervals to reveal the effect of the COVID-19 pandemic. The modified ICSS test shows that the pandemic has led to structural breaks in the volatility of stock indexes. While break dates intensify around February 19–21, 2020 in most of the markets, for the Chinese stock market, the break appears approximately three weeks earlier, on January 30, 2020. The DCC-MVGARCH and DCC-MVFIGARCH models illustrate the effect of the COVID-19 pandemic on dynamic conditional correlations. According to the changes in unconditional correlation coefficients, although the relationship of the Chinese and Turkish stock markets weakens across 2005 to 2019, it displays a 20% rise following the pandemic. Some other market pairs also show soaring correlation coefficients, although these increases are lower, at approximately 10%.