The Covid-19 crisis' impacts on the volatility of the US and Chinese equity markets

Abstract

The repercussions of the COVID-19 crisis on households and companies, as well as the accompanying uncertainty, interrupted global financial markets. In March of 2020, there was evidence of stress on the market for US Treasury securities, money market funds, corporate bonds, and equities markets. Most critically, the financial markets rebounded after several positive signals sent to the markets, including the vaccination progression. The S&P 500 and CSI 300 indexes recovered nearly all of their losses by August 2020 and was progressively escalating despite their loss of approximately 34 percent in February and March 2020 during the COVID-19 collapse. Likewise, corporate bond rates in the US (relative to 10-year Treasury yields) skyrocketed in February and March of 2020, but quickly recovered and returned to pre-crisis levels within the same year. Governments and central banks initiated measures to mitigate the harm by increasing liquidity and modifying lending regulations. On March 15, 2020, the Federal Reserve (FED) decided to implement a policy of zero interest rates and a quantitative easing (QE) program with a total of 700 billion dollars. In response to impending economic headwinds, the People's Bank of China (PBOC) reduced one-year benchmark interest rates by more than 5 basis points. The effectiveness of such monetary policy innovations in minimizing the detrimental effects of COVID-19 was still a matter of discussion.

This paper aims to assess the impact of the COVID-19 pandemic on the world's two largest stock markets. The market panic caused by the crisis, exacerbated by central bank responses and oil price collapses during the epidemic, then enables an analysis into whether such elevated levels of uncertainty affected the volatility of domestic and international equities markets. Potential transmission mechanisms that might explain the emergence of spillovers are simultaneously evaluated.

The global pandemic COVID-19 in 2020-2021 had a profound impact on economies, societies, and stock markets around the world. The results indicate that heightened uncertainty during the pandemic had a significant impact on the volatility of stock markets. In this study, an EGARCH model to the US and Chinese composite indices is utilized and then adjusted for factors including investors’ fear caused by COVID-19, policy rates imposed by central banks, and crude oil prices to analyze several key findings. The findings imply that raising investor sentiment during COVID-19 could cause a significant drop in composite indexes and a significant increase in market volatility in both the US and China. To enable their economies to recover from the COVID-19 epidemic, the FED and PBOC announced policy rate adjustments. Nonetheless, it is emphasized that interest rate cuts by central banks generated heightened volatility in stock markets. Ultimately, a decline in crude oil prices was inversely associated with an increase in market volatility. Spillover effects on foreign markets were also significant, highlighting the necessity of global value chain coordination.