[Paper Review] Coronavirus and financial volatility: 40 days of fasting and fear

Albulescu, Claudiu|arXiv (Cornell University)|Mar 9, 2020

COVID-19 Pandemic Impacts10 references30 citations

TL;DR

The paper investigates how official COVID-19 announcements (new cases, death ratio) affect the financial volatility index (VIX) 40 days after the outbreak, finding death ratios and cross-country impact increase VIX, with broader geographic spread amplifying volatility.

ABSTRACT

40 days after the start of the international monitoring of COVID-19, we search for the effect of official announcements regarding new cases of infection and death ratio on the financial markets volatility index (VIX). Whereas the new cases reported in China and outside China have a mixed effect on financial volatility, the death ratio positively influences VIX, that outside China triggering a more important impact. In addition, the higher the number of affected countries, the higher the financial volatility is.

Motivation & Objective

• Motivate the study by the rapid onset of COVID-19 and the need to understand its impact on market volatility.
• Investigate how official reports of new cases and death ratios affect the VIX.
• Assess whether geographic spread (number of affected countries) modulates financial volatility.

Proposed method

• Use an event-driven analysis focusing on official announcements of new infections and deaths.
• Empirically examine the relationship between these announcements and the VIX 40 days after monitoring began.
• Differentiate effects of new cases in China vs outside China, and the role of death ratios.
• Evaluate how the number of affected countries modulates the VIX.

Experimental results

Research questions

• RQ1 Do official announcements of new COVID-19 cases affect the VIX, and does this vary for China vs outside China?
• RQ2 How does the reported death ratio influence the VIX, and is its impact larger outside China?
• RQ3 Does the number of affected countries amplify the effect of COVID-19 announcements on financial volatility?

Key findings

• New case announcements have a mixed effect on the VIX for China and outside China.
• Death ratio announcements positively influence the VIX, with a stronger impact outside China.
• A higher number of affected countries is associated with higher financial volatility (VIX).