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2022 | OriginalPaper | Chapter

Understanding the Impact of COVID-19 on Financial Markets: Animal Spirits or Black Swan?

Authors : Wasim Ahmad, Smarth Gupta, Shirin Rais

Published in: Studies in International Economics and Finance

Publisher: Springer Singapore

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Abstract

This chapter investigates how the financial markets react to the coronavirus outbreak by utilizing an event-study approach. We consider several news-based positive and negative COVID-19 events and their impact on emerging vs. developed markets and major asset classes. We examine the impact of COVID-19 events on the implied volatility of the global financial system, which is strongly observed in March 2020. Even during black swan events, we observe the asymmetric impact of coronavirus outbreaks across assets and markets. The response of black swan events generates a pronounced investor reaction. We also observe the role of ‘Animal Spirits’ through ‘Narrow Framing’ as investors seem to consider the pandemic as short-term shocks.

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The number of regimes is decided based on the appropriate lag structure, statistical criteria, and the diagnostic results of results. We have considered two regime MS-DR models for our analysis.

To conserve space, we have reported the January and February results in Appendix (Table 3).

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Title: Understanding the Impact of COVID-19 on Financial Markets: Animal Spirits or Black Swan?
Authors: Wasim Ahmad
Smarth Gupta
Shirin Rais
Publisher: Springer Singapore
Book: Studies in International Economics and Finance
Print ISBN: 978-981-16-7061-9

Electronic ISBN: 978-981-16-7062-6

Copyright Year: 2022
DOI: https://doi.org/10.1007/978-981-16-7062-6_31