ImpactCOVID19Global-2021

Impact of COVID-19 on Global Stock Market Volatility
Author(s): Teresia Angelia Kusumahadi and Fikri C Permana

Source: Journal of Economic Integration , March 2021, Vol. 36, No. 1 (March 2021), pp. 20-
45
Published by: Center for Economic Integration, Sejong University
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Vol. 36, No. 1, March 2021, 20-45
Journal of Economic Integration https://doi.org/10.11130/jei.2021.36.1.20
ⓒ 2021-Center for Economic Integration, Sejong Institution, Sejong University, All Rights Reserved. pISSN: 1225-651X eISSN: 1976-5525
Impact of COVID-19 on Global Stock Market Volatility
Teresia Angelia Kusumahadi1+ and Fikri C Permana1

1
Atma Jaya Catholic University of Indonesia, Indonesia
Abstract This study aims to examine the impact of COVID-19 on stock return volatility in 15 countries
worldwide. Using daily data from January 2019 to June 2020, we find that changes in exchange rates
have negatively affected stock returns in most countries. We also identify structural changes over the
observation period; these structural changes occur not just after the first case of COVID-19 but also earlier
in the period. Based on threshold generalized autoregressive conditional heteroskedasticity regressions, we
find evidence that the emergence of COVID-19 affected stock return volatility in all observed countries
except the United Kingdom. Furthermore, we find that the presence of COVID-19 in a country positively
affects return volatility. However, the magnitude of this effect is small in every observed country. This
finding suggests the need for in-depth studies of other factors that affect stock return volatility besides
the occurrence of COVID-19.
Keywords: COVID-19; stock return; volatility; structural change; ordinary least squares; threshold
generalized autoregressive conditional heteroskedasticity model
JEL Classifications: C58, F36, F65, G15
Received 12 November 2020, Revised 15 January 2021, Accepted 26 January 2021
I. Introduction
In 2019, the market expected the tensions associated with the United States-China trade war,
the United States presidential election, and Brexit to be the main factors that would affect global
financial markets in 2020. At the end of 2019, however, the world was shocked by an unknown
disease that attacks the respiratory system. This disease first appeared in Wuhan City, Hubei
Province, China, and has continued to spread to this day. At first, it was known as the novel
coronavirus (i.e., 2019-nCoV), but on February 11, 2020, the World Health Organization (WHO)
named it coronavirus disease 2019 (COVID-19). From the date of its first appearance through
the end of June 2020, more than ten million people in more than 200 countries contracted
COVID-19, and 503,862 of them have died (World Health Organization, 2020).
+Corresponding Author: Teresia Angelia Kusumahadi

Lecturer, Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia, Jalan Jenderal Sudirman
No.51, Jakarta 12930, Indonesia. Email: [email protected]
Co-Author: Fikri C Permana
Lecturer, Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia, Jalan Jenderal Sudirman
No.51, Jakarta 12930, Indonesia. Email: [email protected]

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Impact of COVID-19 on Global Stock Market Volatility 21
To prevent further spread, the Chinese government banned all access to the city of Wuhan, whose
population is greater than eleven million, in January 2020. Additionally, the government restricted
entry and exit access to several cities in Hubei. This policy was effective. In March 2020, China
reported no new COVID-19 cases. However, COVID-19’s spread was inevitable. Today, many
countries are struggling to deal with COVID-19, and the WHO has declared it to be a pandemic.
Figure 1 shows that almost all countries are affected by COVID-19.
Figure 1. COVID-19 map as of August 25, 2020
(Source) New York Times, 2020
The spread of COVID-2019 will either directly or indirectly impact not only the health
conditions of the global community but also the economy. This inevitability is reflected in
the statement by the President of China, Xi Jinping, on February 15, 2020, that “coronavirus
will have a relatively large impact on the economy and society.” Xi Jinping’s statement is
very reasonable because the virus’s spread has forced various cities in China and other countries
worldwide to close and stop economic processes, especially production, impacting even the
global supply chain. In March 2020, the International Air Transport Association stated that
COVID-19 would decrease the number of aircraft passengers and reduce global aircraft industry
revenue by $113 billion. Similar declines are likely to occur in the global electronics, vehicle,
telecommunications, trade, and even agriculture and planting industries.
At the same time, the pandemic’s emergence has driven a rapid shift in global financial markets’
focus. The main factors behind this market shift are fear and uncertainty. For example, the decline
in S&P 500 index in the last week of February (i.e., from February 24 to 28) alone resulted
in a loss of market capitalization of over $5 trillion. Decreasing stock prices can show that anxiety
leads investors to behave irrationally, causing them to exhibit biases. As a result, stock prices

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22 Journal of Economic Integration Vol. 36, No. 1
diverge, and the resulting stock market behavior tends toward anomalies (Isidore & Christie, 2018).
Thus, it is not surprising that stock exchanges in various countries affected by COVID-19
declined since the first emergence of the virus through the end of March 2020. From March
2020 through June 2020, stock indexes increased, but they have not yet reached pre-COVID-19
levels.
Figure 2. COVID-19 map as of August 25, 2020 2. changes in the stock indices of several
countries affected by COVID-19 (December 31, 2019 = 100)
(Source) Authors’ calculation using Bloomberg Terminal 2020 data
Figure 2 shows that all countries affected by COVID-19 experienced negative returns. These
negative returns offer a strict warning, to which all global economic stakeholders should comply.
Given that stock prices are a leading economic indicator, or an indicator that tends to rise
or fall in advance of other economic indicators (Bodie, Kane, & Marcus, 2013), this decline
in stock returns may be an important indicator for the overall economy. Furthermore, stock
returns are typically highly volatile, meaning that their values change rapidly and unpredictably
over time. Stock return volatility is also time-varying such that in one period, large changes
may be followed by additional larger changes or small changes may be followed by additional
smaller changes (Hill, Griffiths, & Lim, 2011). These price fluctuations in the market are one
indicator used in financial system stability and can serve as an early warning of possible threats
to financial stability (Sahel & Vesala, 2001).

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This study examines whether COVID-19 has impacted stock return volatility in several countries
affected by the pandemic. Using two different approaches, namely, the fundamental equation
and the threshold generalized autoregressive conditional heteroskedasticity (TGARCH) model,
this study closes a gap in empirical research on COVID-19 and stock volatility, especially in
countries in various parts of the world, including Asia, Europe, the Americas, and Africa. We
expect that the international community, authorities, and economic agents can use these empirical
findings to prepare for unwanted circumstances, especially pandemics. Additionally, this research
can contribute to the academic literature on the stock market and financial system stability.
II. Literature Review
The stock market responds differently to various different events (Ramiah, 2013). Changes
in stock prices over time align with concurrent conditions and information. Internal and external
factors can also affect changes in stock prices. The relevant internal factors are fundamental
aspects of the company, such as its income and dividends (Al-Tamimi, Alwan, & Rahman, 2011).
Several external factors also impact stock prices, one of which is information or news obtained
by investors (Chan, 2003), which can be either positive or negative. Bae and Karolyi (1994)
find that negative domestic and foreign news impacts stock prices more significantly than good
news does.
These factors are inseparable from investors’ reactions to the received information. The behavior
of various individual investors develops into collective behavior, including herding behavior.
Shiller (2003) also states that investors sometimes overreact to news and sometimes barely react
at all (underreact), indicating a bias in stock market investors’ behavior.
The outbreak of a disease is a type of the negative news that can impact prices in the stock
market. Few studies have investigated the effects of outbreaks on stock markets. However, several
studies have examined the impact of severe acute respiratory syndrome (SARS) on stock
performance. The SARS outbreak occurred in 2003. Similar to COVID-19, SARS is a respiratory
disease that has spread to several countries. Nippani and Washer (2004) examine whether SARS
impacted the stock markets in Canada, China, Hong Kong, Indonesia, and the Philippines. By
comparing stock indexes during and before the SARS outbreak, they find that SARS had no
negative impacts except in China and Vietnam.
Chen, Jang, and Kim (2007) evaluate the impact of the SARS outbreak on hotel stocks in
Taiwan. The results show that hotel stocks experienced significant price and income declines
during the SARS outbreak. The study also finds that the tourism industry experienced the most
significant impact of all sectors, with its share prices decreasing by approximately 29%.
Chen, Chen, Tang, and Huang (2009) conduct another study on the impact of the spread of

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disease on stock markets. They aim to determine whether the spread of SARS in Taiwan impacted
several sectors, including the aviation, tourism, retail, and biotechnology sectors, on Taiwan’s stock
exchange. They observe positive shocks to the returns of biotech stocks but negative shocks to
the returns of other stocks.
Albulescu’s (2020) study on COVID-19 is the most recent research on this topic. He aims
to examine whether the numbers of COVID-19 cases and the resulting death rates within and
outside China impacted the financial market volatility index (VIX). Applying a simple regression
to data from the period January 20, 2020, to February 28, 2020, he finds that only new cases
outside of China impacted the VIX. He also finds that the death rate had a positive and
significant impact on the VIX. Other results of this analysis also show that the spread of
COVID-19 increases financial market volatility.
Baker et al. (2020) use a text-based method in their research. They try to observe the stock
market’s reaction to the presence of COVID-19. By evaluating the movement in the United States
stock market from 1900 to April 2020, they find that stock market volatility has been greater
during the COVID-19 pandemic than it was during the Spanish flu pandemic in 1918–1919 and
the influenza pandemics in 1957–1958 and 1968. Moreover, stock market volatility in the United
States was much higher during the emergence of COVID-19 than during the emergences of other
diseases, such as bird flu, SARS, Middle East respiratory syndrome, and Ebola.
Zeren and Hizarci (2020) also test the impact of COVID-19 on the stock market. Their study
includes data from China, South Korea, Italy, Germany, and Spain. Using a cointegration test
and data from January 23, 2020, to March 13, 2020, they find a long-term relationship between
the number of deaths caused by COVID-19 and the stock markets in all countries in their sample.
They also find long-term relationships between some COVID-19 cases and most of the stock
markets in their sample.
Liu, Manzoor, Wang, Zhang, and Manzoor (2020) study the short-term impact of COVID-19
on stock markets in 21 affected countries, including Japan, Korea, Singapore, the United States,
Germany, Italy, and the United Kingdom. Their data span February 21, 2019, to March 18, 2020.
The results show that COVID-19 has negative and significant impacts on returns for the stock
markets considered in their study. Additionally, they find that Asian stock markets reacted more
quickly to COVID-19 and that some of them are recovering rapidly as well. Investors’ fear has
proven to be a mediator and transmission channel for COVID-19’s effects on the stock market.
III. Data and Methodology
For this study, we use daily data from January 1, 2019, to June 30, 2020, with a total of
391 observations. The COVID-19 period is December 31, 2019, to June 30, 2020. Specifically,

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we use data on stock index returns for 15 countries affected by COVID-19. These countries
are located in various parts of the world, including Asia, Europe, the Americas, and Africa.
We choose these 15 countries based on their having the most cases when this study was initiated
(i.e., the end of March 2020) and large market capitalizations. Table 1 lists the stock exchanges
used in this study.
Table 1. List of Stock Exchanges

Countries Stock Exchanges
United States Dow Jones Industrial Average Index
Italy FTSE MIB Index
Spain IBEX 35 Index
Germany Deutsche Boerse AG German Stock Index
China Shanghai Stock Exchange Composite Index
France CAC 40 Index
United Kingdom FTSE 100 Index
Canada S&P/TSX Composite Index
South Korea Korea Stock Exchange KOSPI Index
Brazil Ibovespa Brasil Sao Paulo Stock Exchange Index
Australia S&P/ASX 200 Index
Indonesia Jakarta Stock Exchange Composite Index
South Africa FTSE/JSE Africa Top40 Tradeable Index
Singapore Straits Times Index
Morocco MASI Free Float All Shares Index
The data are secondary data obtained from Bloomberg Terminal. We use the Eviews
application as a tool for data and research analysis.
The returns used in this study are continuously compounded returns, or log returns, which
are calculated as follows:
 

  ln   
 
(1)
Note:   = return obtained by an investor for stock  in period 

   = closing price of index  in period 
     = closing price of index  in period   
The data on continuous compounded returns are used to test the impact of the COVID-19
pandemic on stock return volatility in several countries affected by the disease. In this study,
we use two main approaches, which complement each other, to determine whether COVID-19

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has significantly affected return volatility. These two methods are the fundamental equation
and the TGARCH model.
A. Fundamental equation
Although it is challenging to explain the fundamental equation of stock index movement

because it is affected by many factors, Dornbusch, Park, and Claessens (2000) state that
fundamental economic conditions contribute to financial market volatility. Furthermore, Engel
and West (2005) note that the exchange rate reflects a country’s fundamental economic conditions
because it is affected by other fundamental variables, such as the money supply, output, the
inflation rate, and the interest rate. Sarno and Schmeling (2014) reaffirm that the exchange rate
is a strong and significant predictor of future macroeconomic fundamentals.
Likewise, Arifin and Syahruddin (2011) find evidence that fluctuations in exchange rates,
defined as the value of a local currency in United States dollars, substantially impact stock
market volatility in ASEAN-5 countries. This finding is confirmed by Jebran and Iqbal (2016),
who observe asymmetric volatility between the stock and foreign exchange markets in Pakistan,
China, Hong Kong, and Sri Lanka. Based on the former study, we assume that the stock market
fundamental equation is as follows:
        (2)
where  is the stock index return and  represents the change in each country’s exchange
rate relative to the United States dollar. For the United States, we use the United States Dollar
Index.
We use the ordinary least squares (OLS) method and then test the stability of the parameters.
The stability test is an essential step in determining whether structural changes exist using
F-statistics (Chow, 1960). The stability test takes the form of a breakpoint test and recursive
estimation (i.e., a one-step-ahead forecast test). This study uses the multiple breakpoint test,
which is a refinement of the Chow breakpoint test model, to identify some possible breaks
(). The general form of the equation is as follows:
  
        
    
 
  
′

 

  ′  , (3)
   ′  ′  ⋯ ′     ′ . 

 
′
 is the optimal -break estimate of  and 
where  δ
is an estimate of the variance-covariance matrix of 
; it may be robust to serial correlation
and heteroskedasticity, and its form depends on the assumptions regarding the distribution of

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the data and the errors across segments (Bai & Perron, 2003). The number of breaks can be
selected by considering an information criterion, such as the Bayesian information criterion or
the modified Schwarz criterion (i.e., the Liu–Wu–Zidek (LWZ) criterion).
The one-step-ahead forecast test produces a plot of residuals and standard errors over the
observation period with a P-value of ≤ 15%. This plot describes the structural changes during
the observation period.
B. TGARCH model
As stated before, stock return data mostly exhibit high and time-varying volatility, which
usually leads to heteroskedasticity problems. Thus, this study uses the TGARCH model, an
extension of the generalized autoregressive conditional heteroskedasticity (GARCH) model. We
use a GARCH model to overcome the heteroskedasticity that arises from highly volatile data.
Moreover, we use the TGARCH model to allow for different effects of good and bad news
on volatility. The model used in this study is as follows:
     (4)
                                  , (5)
where  is COVID-19 in the  countries affected by COVID-19. Equation (4) is the conditional
mean equation for stock index returns, and equation (5) is the variance equation, which models
the volatility. We use the parameter  in equation (5) to investigate the autoregressive conditional
heteroskedasticity (ARCH) effect, that is, whether a shock in the previous period affects stock
return volatility. Moreover, we use the parameter  to check whether stock return volatility
is affected by volatility in the previous period (i.e., the GARCH effect). The TGARCH effect
is reflected by the parameter , which indicates whether positive and negative shocks impact
stock return volatility differently.
To address this study’s objective, that is, testing whether COVID-19 affects stock return
volatility, we use the dummy variables  and    . The dummy variable  takes a value
of one when COVID-19 is present and a value of zero when it is absent.    is also a
dummy variable and takes a value of one if COVID-19 is present in the country with stock
index . Thus,     accounts for the possibility that COVID-19 may have a greater impact
on the given country. If stock index  never experiences COVID-19 during the observed period,
the variable     drops out of the equation. The total average effect of COVID-19 in the
country with stock index  is  π .

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IV. Analysis
A. Descriptive analysis
Before carrying out the empirical analysis, we conduct a descriptive analysis of the COVID-19
period, defined as December 31, 2019, to June 30, 2020. Figure 3 shows that volatility is high
in most countries, with high volatility primarily occurring in March 2020.
Figure 3. Stock return volatility in observed countries

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The returns in each of the countries affected by COVID-19 reach their highest and lowest
points in March 2020. Moreover, this high volatility occurs over a wide range of returns within
a short period. For example, on March 12, 2020, the stock exchange in Brazil experienced a
decline in returns of 15.99%, but the returns increased by 13.02% on the following day. A similar
brief return movement also occurred in Singapore. On March 23, 2020, the stock index fell
to its lowest position with a return of -7.64%, but it subsequently rose with a return of 5.89%
two days later. In Indonesia, the lowest return was -6.81% on March 9, 2020, but the return
increased to 9.70% over the next two weeks. Figure 4 shows the lowest and highest returns
in each country affected by COVID-19.
Figure 4. Lowest and highest returns in observed countries
The range of global stock market returns was very high during the COVID-19 period,
especially in March 2020, as returns ranged from -18.54% to 13.02%. The range of global
stock market returns tended to be lower prior to the pandemic, ranging from -3.64% to 2.82%.
When we exclude March 2020 from the sample, the volatility of global stock market returns
ranges from -8.04% to 7.45%. This return range is still greater than that before the emergence
of COVID-19. Based on the descriptive analysis, we show that the returns in the observed
countries exhibit high volatility, reflected in their rapid changes across periods. We also observe
that stock returns exhibit time-varying volatility.
Next, we conduct a descriptive analysis using data on COVID-19 cases. The number of
cases in each country has been increasing as of June 30, 2020, as Figure 5 shows. Figure
5 also shows that the number of cases in China has reached its peak, and the number of

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COVID-19 cases in China is currently not significantly increasing. We observe a similar pattern
for South Korea, as the flattening curve is an indication that a country is reducing its number
of cases. In addition to China and South Korea, some other countries in this study are also
experiencing flattening curves. These countries are Singapore, Australia, Canada, the United
Kingdom, Italy, Spain, Germany, and France. However, other countries’ case numbers, including
those of Indonesia, the United States, Brazil, South Africa, and Morocco, are still exhibiting
exponential growth patterns, as Figure 5 shows.
Figure 5. Number of COVID-19 cases in observed countries
(Source) Author’s calculation using Bloomberg Terminal 2020 data
Moreover, European countries have experienced the highest death rates. As shown in Table
2, the United Kingdom has the highest COVID-19 death rate of 15.36%, followed by France,
with a death rate of 14.77%; Italy, with a death rate of 14.45%; and Spain, with a death rate
of 11.38%. Among the Asian countries, Indonesia has the highest death rate, and Singapore
has the lowest death rate. Furthermore, even though the United States is the country with the
most cases as of June 30, 2020, its death rate is below the average for the observed countries1).
1) The average death rate is 6.37%.

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Table 2. Numbers of COVID-19 Cases and Deaths

Countries First Cases #Cases #Death Death Rate (%)
United Kingdom 31-Jan-20 285,216 43,815 15.36
France 24-Jan-20 202,063 29,846 14.77
Italy 31-Jan-20 240,578 34,767 14.45
Spain 03-Feb-20 249,271 28,355 11.38
Canada 27-Jan-20 106,097 8,650 8.15
China 31-Dec-19 84,785 4,641 5.47
Indonesia 02-Mar-20 56,385 2,876 5.10
United States 21-Jan-20 2,636,414 127,432 4.83
Germany 27-Jan-20 195,418 8,990 4.60
Brazil 26-Feb-20 1,402,041 59,594 4.25
South Korea 21-Jan-20 12,850 282 2.19
Morocco 02-Mar-20 12,533 228 1.82
South Africa 05-Mar-20 151,209 2,657 1.76
Australia 27-Jan-20 7,920 104 1.31
Singapore 23-Jan-20 43,907 26 0.06
(Source) Authors’ calculations using Bloomberg Terminal 2020 data and the R “coronavirus” package.
B. Empirical analysis
1. Fundamental Equation
As with any other time-series data, we conduct a unit root test before estimating the fundamental
equation using OLS. We use two unit root tests: the augmented Dickey-Fuller (ADF) test (Dickey
& Fuller, 1979) and the Phillips-Perron (PP) test (Phillips & Perron, 1988). The unit root tests
show that all of the variables in our analysis are stationary and have the same degree of integration
at the difference level (0). We then estimate the OLS regression.
The OLS estimation results shown in Table 3 indicate that exchange rates significantly impact
stock index returns in most of the observed countries. However, in several countries, such
as Morocco, Italy, Spain, Germany, and the United States, the exchange rate’s impact on stock
index returns is insignificant. Table 3 shows that exchange rates and stock index returns are
negatively related in China, the United Kingdom, Canada, South Korea, Brazil, Australia,
Indonesia, South Africa, and Singapore. Thus, an exchange rate appreciation forces stock index
returns to increase in these countries.
We use the OLS estimation results as a basis for estimating the breakpoint test to identify
periods when abnormal changes occur. Table 4 shows the estimation results of breakpoint tests
based on the Schwarz and LWZ criteria. We observe differences in the break dates across
the observed countries. In some countries, the break dates are before the first COVID-19 case
or before December 31, 2019. We observe such a result for China, the first country to experience

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Table 3. OLS Estimation

Constant Independent (ER)
Negara Dependent
Coeff. P-value Coeff. P-value
United States USA_return 0.00025 0.7912 0.18758 0.4593
Italy Italy_Return 0.00014 0.8827 0.13727 0.5503
Spain Spain_Return -0.0004 0.6059 0.07831 0.7069
Germany Germany_Return 0.00039 0.6400 -0.0038 0.9857
China China_Return 0.00051 0.3809 -0.7374 0.0002*
France France_Return 0.00011 0.8942 -0.023 0.9115
United Kingdom UK_Return -0.0002 0.7822 -0.2526 0.0331*
Canada Canada_Return 0.00019 0.8058 -1.7238 0.0000*
South Korea South_Korea_Return 0.00046 0.3709 -1.8548 0.0000*
Brazil Brazil_Return 0.00112 0.2845 -1.0458 0.0000*
Australia Australia_Return 0.00014 0.8478 -0.5779 0.0000*
Indonesia Indonesia_Return -0.0006 0.2506 -1.3153 0.0000*
South Africa South_Africa_Return 0.00045 0.5554 -0.5431 0.0000*
Singapore Singapore_Return -0.0003 0.5564 -1.8400 0.0000*
Morocco Morocco_Return -0.0003 0.1887 0.5806 0.2847
(Source) Authors’ calculations. *Significant at the 5% level
COVID-19, as the break date on its stock index is estimated to be April 5, 2019.
Break dates prior to the first case of COVID-19 are also observed for the United States, Italy,
Spain, Germany, France, the United Kingdom, Singapore, Canada, Brazil, and South Africa,
as Table 4 shows. However, these countries also have break dates after the first case of COVID-19
or after December 31, 2019. The existence of break dates before the COVID-19 pandemic may
be explained by the fundamental model used to estimate breakpoints. In this model, exchange
rates affect stock return volatility. Given that the exchange rate reflects a country’s fundamental
condition and is affected by fundamental variables, including the money supply, output, the
inflation rate, the interest rate, and capital flows, break dates before COVID-19 may be driven
by these fundamental variables.
Other countries, such as South Korea, Australia, Indonesia, and Morocco, have break dates
after December 31, 2019. Moreover, all observed countries except China have break dates after
December 31, 2019, and these break dates range from January 3, 2020, to March 30, 2020.
Australia and South Africa have break dates in January 2020, Morocco has a break date in
February 2020. Most of the observed countries, such as Singapore, Italy, the United Kingdom,
Canada, the United States, Spain, Germany, France, and South Africa, have break dates in
March 2020. Indonesia and Brazil are the countries with break dates in April 2020.

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Table 4. Breakpoint Test Estimations

Variable Breakpoint Test
Countries First Cases Estimated Schwarz LWZ
Dependent Independent
Break Dates Criterion Criterion
China 31-Dec-19 China_Return China_ER 05-Apr-19 -8.893638 -8.853896
USA 21-Jan-20 USA_Return USA_ER 01-Aug-19 -7.984122 -7.874426
27-Dec-19
18-Mar-20
South Korea 21-Jan-20 South_Korea_Return South_Korea_ER 06-Jan-20 -9.213377 -9.11801
27-Mar-20
Singapore 23-Jan-20 Singapore_Return Singapore_ER 16-Dec-19 -9.040129 -8.945654
09-Mar-20
France 24-Jan-20 France_Return France_ER 16-Jul-19 -8.23696 -8.165837
30-Dec-19
20-Mar-20
Germany 27-Jan-20 Germany_Return Germany_ER 30-Dec-19 -8.194028 -8.132395
20-Mar-20
Canada 27-Jan-20 Canada_Return Canada_ER 19-Aug-19 -8.606047 -8.446921
26-Dec-19
17-Mar-20
Australia 27-Jan-20 Australia_Return Australia_ER 03-Jan-20 -8.43501 -8.381428
25-Mar-20
Italy 31-Jan-20 Italy_Return Italy_ER 22-Jul-19 -8.020174 -7.952805
19-Dec-19
10-Mar-20
United Kingdom 31-Jan-20 UK_Return UK_ER 20-Dec-19 -8.479416 -8.398173
11-Mar-20
Spain 03-Feb-20 Spain_Return Spain_ER 01-May-19 -8.228481 -8.150132
30-Dec-19
24-Mar-20
Brazil 26-Feb-20 Brazil_Return Brazil_ER 28-Aug-19 -7.824469 -7.70734
16-Jan-20
08-Apr-20
Morocco 02-Mar-20 Morocco_Return Morocco_ER 24-Feb-20 -9.100335 -9.060594
Indonesia 02-Mar-20 Indonesia_Return Indonesia_ER 07-Apr-20 -9.038642 -8.9989
South Africa 05-Mar-20 South_Africa_Return South_Africa_ER 15-Oct-19 -8.498606 -8.343623
08-Jan-20
30-Mar-20
(Source) Authors’ calculations.

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Interestingly, most of the observed countries have break dates after their first domestic
COVID-19 cases; these countries include the United States, Italy, Spain, Germany, France, the
United Kingdom, Canada, Brazil, Indonesia, and Singapore. However, several countries’ break
dates are prior to their first domestic COVID-19 cases. These countries are China, South Korea,
Australia, South Africa, and Morocco.
The one-step-ahead forecast produces a plot of the recursive residuals and standard errors
and the sample points with P-values less than or equal to 15%, as Figure 6 shows. The upper
portion of the plot, measured on the right vertical axis, displays the recursive residuals and
standard errors. Residuals outside the standard error bands suggest that the equation’s parameters
are unstable.
Figure 6. One-step-ahead forecasts

United States Italy
.15 .1
.10
.05 .0
.00
-.05 -.1
-.10
.000 -.15 .000 -.2
.025 .025
.050 .050
.075 .075
.100 .100
.125 .125
.150 .150
I II III IV I II I II III IV I II
2019 2020 2019 2020
One-Step Probability One-Step Probability

Recursive Residuals Recursive Residuals
Spain Germany
.10 .15
.05 .10
.00 .05
-.05 .00
-.10 -.05
-.15 -.10
.000 -.15
-.20 .000
.025 .025
.050 .050
.075 .075
.100 .100
.125 .125
.150 .150
2019 2020 2019 2020


89.175.46.45 on Sun, 01 Dec 2024 09:09:37 UTC
Figure 6. Continued
China France
.08 .10
.04 .05
.00 .00
-.05
-.04
-.10
-.08
.000
.000 -.15
.025 -.12
.025
.050
.050
.075 .075
.100 .100
.125 .125
.150 .150
2019 2020 2019 2020

United Kingdom Canada

.10 .15
.05 .10
.05
.00
.00
-.05
-.05
-.10 -.10
.000 .000
-.15 -.15
.025 .025
.050 .050
.075 .075
.100 .100
.125 .125
.150 .150
2019 2020 2019 2020

South Korea Brazil

.06 .2
.04
.1
.02
.00 .0
-.02
-.1
-.04
.000 -.06 .000 -.2
.025 .025
.050 .050
.075 .075
.100 .100
.125 .125
.150 .150
2019 2020 2019 2020


89.175.46.45 on Sun, 01 Dec 2024 09:09:37 UTC
Figure 6. Continued
Australia Indonesia
.08 .12
.04 .08
.00 .04
-.04 .00
-.08 -.04
.000 .000
-.12 -.08
.025 .025
.050 .050
.075 .075
.100 .100
.125 .125
.150 .150
2019 2020 2019 2020

outh Africa Singapore

.08 .08
.04
.04
.00
.00
-.04
-.04
-.08
.000 .000 -.08
-.12
.025 .025
.050 .050
.075 .075
.100 .100
.125 .125
.150 .150
2019 2020 2019 2020

Morocco
.08
.04
.00
-.04
-.08
.000
-.12
.025
.050
.075
.100
.125
.150
I II III IV I II
2019 2020
One-Step Probability
Recursive Residuals
(Source) Author’s calculations.
The lower part of the plot, measured on the left vertical axis, shows the P-values for the sample
points for which the hypothesis of parameter constancy is rejected at the 5%, 10%, or 15%

89.175.46.45 on Sun, 01 Dec 2024 09:09:37 UTC
significance level (“EViews Help: Stability Diagnostics,” n.d.). The points with P-values below
the usual significance level (i.e., 0.05) correspond to those points whose recursive residuals are
outside the two standard error bounds. In this case, we find evidence of instability in the observed
period for all observed countries. In each country, the one-step probability is less than 0.05.
This finding supports the results of the breakpoint tests, which indicate structural changes during
the observed period.
2. TGARCH Model
Before performing regressions using the TGARCH method, we perform a normality test to
determine whether the residuals are normally distributed by examining the Jarque-Berra P-values,
skewness, and kurtosis of their distribution. The existence of a non-normal distribution indicates
volatility clustering for the returns. Table 5 shows the results of the residual normality test for
the returns.
As Table 5 shows, all of the variables have skewness values that are different from zero, meaning
that the distribution is left-skewed. In addition, the kurtosis values are greater than three, indicating
a leptokurtic, or non-normal, distribution. Using an alpha value of 0.05, we can reject the null
hypothesis that the residuals follow a normal distribution. Thus, we can conclude that the residual
distribution of the returns is not normal.
Table 5. Normality Test Results

Normality Test China South Korea Indonesia Singapore Australia
Skewness -1.032145 -0.178659 0.269611 -0.831947 -1.465815
Kurtosis 11.38932 12.60880 15.40914 13.35750 14.52893
P-value 0.0000 0.0000 0.0000 0.0000 0.0000
Normality Test US Canada Brazil South Africa Morocco
Skewness -1.022245 -1.787362 -1.701166 -1.166497 -2.516095
Kurtosis 18.24626 29.09907 19.24047 13.46653 27.53884
P-value 0.0000 0.0000 0.0000 0.0000 0.0000
Normality Test UK Italy Spain Germany France
Skewness -1.506401 -3.389028 -2.377722 -1.174983 -1.805006
Kurtosis 18.28206 36.35001 25.07150 18.60026 17.91261
P-value 0.0000 0.0000 0.0000 0.0000 0.0000
(Source) Authors’ calculation.
We also perform an ARCH effect test to evaluate the heteroskedastic properties of the return
variables. The null hypothesis is that there is no ARCH effect because the variance residuals
are constant. As Table 6 shows, we find strong evidence that the variance residuals of the variables
exhibit ARCH effects. Based on this result, we use the TGARCH model to estimate the impact

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of COVID-19 on global stock market volatility.
Table 6. ARCH Effect Test Results

Heteroskedasticity Test: ARCH China South Korea Indonesia Singapore Australia
F-statistic 15.91620 301.78370 21.25793 122.76670 92.59830
Obs*R-squared 15.99170 170.62690 20.25763 93.73952 75.14246
P-value 0.0001 0.0000 0.0000 0.0000 0.0000
Heteroskedasticity Test: ARCH US Canada Brazil South Africa Morocco
F-statistic 89.91991 85.36585 202.09910 8.86183 16.50397
Obs*R-squared 73.37791 70.33182 133.56850 8.70861 15.91220
P-value 0.0000 0.0000 0.0000 0.0032 0.0001
Heteroskedasticity Test: ARCH UK Italy Spain Germany France
F-statistic 7.60239 6.46788 5.98992 14.54010 30.13078
Obs*R-squared 7.49473 6.39462 5.92926 14.60960 30.05271
P-value 0.0062 0.0114 0.0149 0.0000 0.0000
(Source) Authors’ calculations.
The previous breakpoint test found structural changes during the observed period. Thus,
in this model, we define periods based on the estimated break dates to examine whether
COVID-19 impacts stock return volatility in each country.
Table 7 shows the estimation results using the TGARCH method in Asia and Australia.
As Table 7 shows, COVID-19 significantly impacts stock return volatility. However, its effect
differs in different countries. In China and Singapore, the first global occurrence of COVID-19
affects stock return volatility. Conversely, in South Korea, Indonesia, and Australia, COVID-19
only impacts stock return volatility after the first domestic case. Although we find evidence
that COVID-19 impacts stock volatility, this impact is small, as the parameter estimates of
 and     indicate.
The estimation results in Table 7 also provide evidence of ARCH and GARCH effects.
The ARCH effect means that stock return volatility in a given country is affected by the previous
period’s shock. Additionally, the GARCH effect means that stock return volatility is affected
by the previous period’s volatility. We also find TGARCH effects, meaning that positive and
negative shocks have different impacts in the observed countries.
As Table 7 shows, negative shocks have greater impacts on stock return volatility than
positive shocks do in all observed countries. Stock return volatility is more affected by negative
shocks in Singapore than in the other Asian countries in our sample. In Singapore, the effect
of a negative shock on stock return volatility is 0.406 points higher than that of a positive
shock. Stock return volatility is less affected by negative shocks in Australia than in the other
Asian countries.

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Table 7. TGARCH Estimation Results - 1

Mean Equation China South Korea Indonesia Singapore Australia
Constant -0.000609 0.000444 -0.000328 -1.47E-05 0.0007
(0.271) (0.0778) (0.2058) (0.9536) (0.0979)
Variance Equation China South Korea Indonesia Singapore Australia
Constant 1.15E-05 8.26E-06 1.32E-05 3.56E-07 5.25E-06
(0.0000)* (0.0000)* (0.0013)* (0.1505) (0.0005)*
ARCH Effect -0.11842 -0.135466 -0.121836 -0.240079 -6.91E-02
(0.0000)* (0.0000)* (0.0000)* (0.0217)* (0.0014)*
TGARCH Effect 0.28949 0.31227 0.317998 0.406852 2.11E-01
(0.0000)* (0.0000)* (0.0001)* (0.0336)* (0.0000)*
GARCH Effect 0.885804 0.846509 0.688946 0.81234 8.46E-01
(0.0000)* (0.0000)* (0.0000)* (0.0000)* (0.0000)*
 -3.38E-06 3.78E-07 2.37E-07 8.54E-06 -2.94E-07
(0.0209)* (0.9527) (0.9516) (0.0047)* (0.9245)
    3.05E-05 0.000433 1.95E-05 2.97E-05
(0.0406)* (0.0458)* (0.3611) (0.0067)*
(Source) Authors’ calculations. *Significant at the 5% level.
Table 8 shows the estimation results for countries in the Americas and Africa. These results
show that COVID-19 also affects stock return volatility in these countries. In Canada and
Morocco, the first emergence of COVID-19 worldwide affects stock return volatility. In contrast,
COVID-19 only impacts stock return volatility in the United States, Brazil, and South Africa
once it emerges domestically. As in the results for Asian countries, we find that the effect
of COVID-19 on stock volatility is small, as the estimates of  and     indicate.
As the estimation results in Table 8 show, we find evidence of the ARCH effect only for
Brazil, South Africa, and Morocco. In those countries, stock return volatility is affected by shocks
in the previous period. We also find evidence that stock return volatility is affected by the
previous period’s volatility in the United States, Brazil, South Africa, and Morocco. Among
our sample countries, South Africa’s stock return volatility is the most affected by volatility
in the previous period. Additionally, we observe the TGARCH effect for the United States, Brazil,
and South Africa. This effect means that negative shocks have greater impacts on stock return
volatility than positive shocks do. Stock return volatility is more affected by negative shocks
in the United States than in the other American and African countries in our sample. Based
on these results, the effect of a negative shock on stock return volatility is 0.485 points greater
than that of a positive shock in the United States. Brazil’s stock return volatility is less affected
by negative shocks than those of other countries are.

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Mean Equation United States Canada Brazil South Africa Morocco
Constant 0.000886 0.000826 0.000955 -0.000729 0.000262
(0.2775) (0.1679) (0.2159) (0.0607) (0.3583)
Variance Equation United States Canada Brazil South Africa Morocco
Constant 4.29E-05 0.000284 1.21E-05 8.28E-06 5.24E-06
(0.3164) (0.0000)* (0.0626) (0.0688) (0.0069)*
ARCH Effect -0.07844 0.46379 -0.149661 -0.232874 0.133955
(0.2632) (0.6358) (0.0019)* (0.0129)* (0.0035)*
TGARCH Effect 0.485623 2.055316 0.181593 0.233318 -0.013399
(0.0113)* (0.0739) (0.0149)* (0.0108)* (0.8677)
GARCH Effect 0.750589 0.0672 0.878029 1.021045 0.619584
(0.0000)* (0.7058) (0.0000)* (0.0000)* (0.0000)*
 -4.31E-05 0.00028 1.37E-05 2.58E-06 1.03E-05
(0.3166) (0.0000)* (0.0574) (0.5633) (0.0244)*
    6.14E-05 0.00000538 0.00086 0.000296 -2.14E-05
(0.0000)* (0.5288) (0.0216)* (0.0086)* (0.9956)
COVID-19 also affects stock volatility in European countries, as Table 9 shows. For Italy,
Spain, Germany, and France, we find evidence that stock return volatility is positively affected
by the first domestic appearance of COVID-19. Thus, when COVID-19 occurs in these countries,
stock return volatility tends to increase. However, the effect of COVID-19 on stock return
volatility is small, as the parameter estimates of  and     indicate. We find no evidence
that COVID-19 affects stock index return volatility in the United Kingdom; this result differs
from those for the other countries in our sample.
As the estimation results in Table 9 show, we find evidence of the ARCH effect only in
Italy. However, we observe the GARCH and TGARCH effects for all European countries except
the United Kingdom. Stock return volatility is more affected by negative shocks in Spain than
in other European countries. The effect of a negative shock on stock return volatility is 0.887
points greater than that of a positive shock in Spain. Italy’s stock return volatility is less affected
by negative shocks than those of other countries are.

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Mean Equation United Kingdom Italy Spain Germany France
Constant -0.000148 -0.001084 -0.001174 -7.67E-06 -0.0021
(0.868) (0.375) (0.5355) (0.9949) (0.1632)
Variance Equation United Kingdom Italy Spain Germany France
Constant 7.24E-06 9.65E-06 0.000399 0.00053 0.000325
(0.2944) (0.1022) (0.4742) (0.3802) (0.4722)
ARCH Effect 0.269038 -0.176168 -0.252104 -0.168124 -0.146647
(0.4107) (0.0008)* (0.1556) (0.1177) (0.5063)
TGARCH Effect 0.585206 0.422251 0.887625 0.718363 0.875517
(0.3175) (0.0000)* (0.0197)* (0.002)* (0.0529)*
GARCH Effect 0.463052 0.773952 0.560098 0.578272 0.536012
(0.1658) (0.0000)* (0.0005)* (0.0000)* (0.0004)*
 -2.91E-06 1.58E-05 -0.000377 -0.000522 -0.000313
(0.7677) (0.0806) (0.4966) (0.3874) (0.4861)
    4.96E-05 8.38E-05 6.35E-05 8.30E-05 6.87E-05
(0.2377) (0.0002)* (0.0565)* (0.0017)* (0.0082)*
V. Conclusion
This study aimed to examine the impact of the COVID-19 pandemic on stock return volatility
in several countries affected by the disease. The descriptive analysis of the return data showed
that each country’s stock returns exhibit high volatility during the COVID-19 pandemic,
especially in March 2020. Moreover, we also found that the number of cases has peaked in
most countries, including China, South Korea, Singapore, Australia, Canada, the United Kingdom,
Italy, Spain, Germany, and France. Additionally, we observed that the curves of COVID-19
cases are flattening in these countries. However, in the other observed countries, that is, Indonesia,
the United States, Brazil, South Africa, and Morocco, the number of cases is still increasing
exponentially. Furthermore, as of June 30, 2020, the average death rate due to COVID-19 was
6.37%.
Our analysis of the fundamental factors affecting stock returns found that changes in the
exchange rate significantly impact stock returns in most of the countries in our sample, with
the exceptions of Morocco, countries that use the euro (i.e., Italy, Spain, Germany, and France),
and the United States. We found that in China, the United Kingdom, Canada, South Korea,
Brazil, Australia, Indonesia, South Africa, and Singapore, the exchange rate negatively affects
stock returns. Thus, an appreciation of the exchange rate forces stock index returns to increase
in these countries.

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In addition, we conducted a breakpoint test to identify structural changes in the stock market
during the observed period. The results show that structural changes occurred in each country
over the observed period. In most countries, structural changes occurred before the first
COVID-19 case. However, in these countries, we also observed break dates after either the
first domestic case of COVID-19 or December 31, 2019.
For periods defined based on the estimated break dates, we examined whether COVID-19
has impacted on stock return volatility in the observed countries. We conducted TGARCH
estimations and found evidence that the emergence of COVID-19 has affected stock return
volatility in all observed countries except the United Kingdom. In China, Singapore, Canada,
and Morocco, the first global outbreak of COVID-19 affected stock return volatility. In contrast,
for South Korea, Indonesia, Australia, United States, Brazil, South Africa, Italy, Spain, Germany,
and France, we found evidence that volatility returns are positively affected by the domestic
emergence of COVID-19. Thus, when COVID-19 first occurred in these countries, stock return
volatility tended to increase. However, the effect of COVID-19 on stock volatility is small
in all of the observed countries.
Based on our findings, we encourage researchers to conduct more in-depth studies of the
factors that affect stock return volatility, especially during pandemics, because other factors
besides the occurrence of COVID-19 may affect stock return volatility. For example, factors
such as the number of cases, the number of deaths, the death rate, and the government’s response
to the COVID-19 may impact stock return volatility.
Additionally, as a recommendation to policymakers, we suggest that governments should
not just focus on the health sector but should also maintain the exchange rate’s stability because
both factors are closely related to stock return volatility. The health sector affects households’
behavior and demand for products and corporate cash flows. Although the exchange rate may
change corporation’s cost structures, it may also affect product competitiveness at a global
scale. Furthermore, cash flows and product competitiveness can allow investors to determine
the fair value of a corporation and generate sentiment, affecting stock prices.
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Appendix 1. Unit Root Test

ADF Test PP Test
Countries Variable
t-stat P-value Adj t-stat P-value
USA USA_return -6.4610 0.0000* -26.2003 0.0000*
USA_ER -17.2126 0.0000* -17.2629 0.0000*
Italy Italy_Return -8.9053 0.0000* -21.7126 0.0000*
Italy_ER -18.0743 0.0000* -18.1337 0.0000*
Spain Spain_Return -11.2448 0.0000* -21.5626 0.0000*
Spain_ER -18.0743 0.0000* -18.1337 0.0000*
Germany Germany_Return -12.0951 0.0000* -19.8406 0.0000*
Germany_ER -18.0743 0.0000* -18.1337 0.0000*
China China_Return -20.4378 0.0000* -20.4381 0.0000*
China_ER -21.5407 0.0000* -21.4627 0.0000*
France France_Return -11.9300 0.0000* -20.0238 0.0000*
France_ER -18.0743 0.0000* -18.1337 0.0000*
UK UK_Return -6.5191 0.0000* -19.9070 0.0000*
UK_ER -16.5986 0.0000* -16.5834 0.0000*
Canada Canada_Return -5.8653 0.0000* -24.9417 0.0000*
Canada_ER -19.0444 0.0000* -19.0600 0.0000*
South Korea South_Korea_Return -11.6051 0.0000* -20.5550 0.0000*
South_Korea_ER -13.3737 0.0000* -23.3565 0.0000*
Brazil Brazil_Return -25.2867 0.0000* -24.5413 0.0000*
Brazil_ER -20.8581 0.0000* -20.9020 0.0000*
Australia Australia_Return -9.3117 0.0000* -24.5785 0.0000*
Australia_ER -16.5283 0.0000* -16.7571 0.0000*
Indonesia Indonesia_Return -17.4479 0.0000* -17.7342 0.0000*
Indonesia_ER -9.4867 0.0000* -18.5274 0.0000*
South Africa South_Africa_Return -9.3498 0.0000* -21.1624 0.0000*
South_Africa_ER -19.1982 0.0000* -19.2172 0.0000*
Singapore Singapore_Return -6.5819 0.0000* -21.4111 0.0000*
Singapore_ER -8.4821 0.0000* -18.9219 0.0000*
Morocco Morocco_Return -16.2839 0.0000* -16.2883 0.0000*
Morocco_ER -11.0218 0.0000* -18.6156 0.0000*

89.175.46.45 on Sun, 01 Dec 2024 09:09:37 UTC

ImpactCOVID19Global-2021

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Impact of COVID-19 on Global Stock Market Volatility

Author(s): Teresia Angelia Kusumahadi and Fikri C Permana

Stable URL: https://www.jstor.org/stable/10.2307/26985574

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Impact of COVID-19 on Global Stock Market Volatility

Teresia Angelia Kusumahadi1+ and Fikri C Permana1

JEL Classifications: C58, F36, F65, G15

Received 12 November 2020, Revised 15 January 2021, Accepted 26 January 2021

+Corresponding Author: Teresia Angelia Kusumahadi

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Figure 1. COVID-19 map as of August 25, 2020

(Source) New York Times, 2020

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(Source) Authors’ calculation using Bloomberg Terminal 2020 data

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II. Literature Review

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III. Data and Methodology

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Table 1. List of Stock Exchanges

Note:   = return obtained by an investor for stock  in period 

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Although it is challenging to explain the fundamental equation of stock index movement

        (2)

   ′  ′  ⋯ ′     ′ . 

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                                  , (5)

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Figure 3. Stock return volatility in observed countries

(Source) Authors’ calculation using Bloomberg Terminal 2020 data

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Figure 4. Lowest and highest returns in observed countries

(Source) Authors’ calculation using Bloomberg Terminal 2020 data

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Figure 5. Number of COVID-19 cases in observed countries

(Source) Author’s calculation using Bloomberg Terminal 2020 data

1) The average death rate is 6.37%.

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Table 2. Numbers of COVID-19 Cases and Deaths

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Table 3. OLS Estimation

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Table 4. Breakpoint Test Estimations

(Source) Authors’ calculations.

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Figure 6. One-step-ahead forecasts

One-Step Probability One-Step Probability

One-Step Probability One-Step Probability

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One-Step Probability One-Step Probability

United Kingdom Canada

One-Step Probability One-Step Probability

South Korea Brazil

One-Step Probability One-Step Probability

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One-Step Probability One-Step Probability

outh Africa Singapore

One-Step Probability One-Step Probability

(Source) Author’s calculations.

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