VOLATILITY SPILLOVER EFFECTS AMONG DEVELOPED MARKETS DURING THE COVID-19 PANDEMIC: A MULTIVARIATE GARCH APPROACH

The COVID-19 pandemic has affected the world starting from the end of 2019 to the whole year of 2020 and has had a remarkable impact on stock markets worldwide, leading the asset volatilities to reach peaks in their values far above their standard fluctuations. The uncertainty concerning the issues of facing the first pandemic in the modern era translated not only into a more sensitive reaction of the assets to their own shocks and volatility swings but also to the volatility of foreign markets. Using both the DCC and BEKK multivariate GARCH models, differentiating between the pre and post COVID-19 pandemic time periods, we find that during the health crisis, volatility spillovers among markets reached impressive values, with a clear departure from the pre-pandemic mean behavior. Moreover, results indicate that the virus uncertainty scenario has led shocks in the conditional correlations to be more challenging to reabsorb, in order to draw the connections linking the international markets back to their long-term mean values. Nonetheless, the multivariate GARCH analysis suggests that the covariance inflated values characterizing the coronavirus time period are mainly driven by the boosted variances affecting every single market, as the estimated conditional correlations show evidence of stationarity around their means, even during the period of turmoil. The findings of this study add a relevant contribution to the financial contagion framework because of the peculiarity of the crisis that shook the international markets during the time span analyzed: the coronavirus pandemic is the first health crisis to have such an impact on the financial context and embodies the perfect example of how an unforeseeable exogenous shock can deviate stock market series from their equilibrium path. That is why it is important to deeply analyze this framework, in order to get a clearer insight into how financial markets behave in an epidemic background. To our knowledge, this is the first time that a multivariate GARCH analysis is implemented using two different methodological approaches, BEKK and DCC, to quantify the impact of a pandemic on international stock markets, providing a novel outlook in the volatility spillover analysis between developed markets of different continents.