Financial markets under the global global financial markets articles pandemic of COVID
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Financial markets under the global global financial markets articles pandemic of COVID
Policy reactions to contain the virus and level the stock markets are needed; however, non-conventional policy interventions, such as the US’ unlimited QE, create further uncertainty and may cause long-term problems. In addition, countries are not working together to cope with these challenges, as markets in the country group studied here are responding differently to national-level policies and the general development of the pandemic. Ultimately, this tendency toward disintegration in the global community is more of a threat than the virus. c School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China Note: The countries are selected and ranked according to John Hopkins Coronavirus Resource Center; they are the top 10 infected countries by number of confirmed cases . Iran is not included due to the unavailability of its stock market data. Std_February and Std_March are the standard deviations of daily returns in February and March, respectively. Rank 01 is the country ranking according to Std_February. Rank 02 is the country ranking according to Std_March. Daily data up to 27 March, 2020 were collected to explore the patterns of stock market reactions. The indexes for all stock markets across the world were downloaded from investing.com. All the data on the global coronavirus infections are from John Hopkins Coronavirus Resource Center. Supports from the National Natural Science Foundation of China under Grant No. 71974159, 71974181, 71774152, and Youth Innovation Promotion Association of Chinese Academy of Sciences are acknowledged. The correlations in February are relatively low, but they increase substantially upon entering March. The highest level appears in the week ending on 6 March, 2020 when Europe and the US starting to lose control, prompting the WHO to announce a pandemic during the weekend . The correlation in the week ending on 20 March, 2020 is surprisingly low. It is obvious that investors around the world had different opinions of the US’ zero-percent interest rate policy, until the new unlimited QE was announced in the following week. Although there is a worldwide market rebound in the week after, driving higher correlations, the long-term impacts of the US’ policies remain unclear. Dayong Zhang: Conceptualization, Writing - original draft, Writing - review & editing. Min Hu: Software, Data curation. Qiang Ji: Supervision, Writing - review & editing, Funding acquisition. COVID-19 was brought to the world's attention in January, 2020. The rapid spread of the virus and the rising number of confirmed cases trigged quick reactions from the Chinese government. On 23 January, 2020, the lockdown of the entire city of Wuhan shocked the whole world, later proving to be a very effective policy intervention by the Chinese government. One week later, the WHO declared the outbreak in China to be a public health emergency of international concern . At that point, the total number of confirmed cases were 7,711, with only 83 cases in 18 countries outside of China. 4 Referring to the right panel, the MST after the announcement tells quite a different story. The European group remains highly connected. The UK and Spain replace Germany and the Netherlands to become the core members, which is consistent with the trajectory of the COVID-19 outbreak. Although Germany remains highly affected, its fatality rate is far lower than that of all the other countries shown here. Four Asian stock markets scattered before the announcement; however, they form a cluster after the announcement. Although a local core is yet to emerge, these four Asian markets are definitely more integrated. Heat map of pairwise correlations before and after the WHO announcement. Overall, the evidence here shows that regional market integration/collaboration is likely to appear in the face of this major crisis. The US stock market, whether before the crisis became global or after, has failed to take a leading role in the world. Financial markets under the global global financial markets articles pandemic of COVIDFinancial markets under the global global financial markets articles pandemic of COVID This paper provides a simple but original statistical analysis of the impact of the COVID-19 pandemic on stock market risk. The virus has already claimed thousands of lives and brought significant challenges to countries from all over the world. The financial markets have seen dramatic movement on an unprecedented scale. The present results show that global financial market risks have increased substantially in response to the pandemic. Individual stock market reactions are clearly linked to the severity of the outbreak in each country. The great uncertainty of the pandemic and its associated economic losses has caused markets to become highly volatile and unpredictable. a Research Institute of Economics and Management, Southwestern University of Finance and Economics, China a Research Institute of Economics and Management, Southwestern University of Finance and Economics, China South Korea was the second country to experience a major outbreak of COVID-19, closely followed by Iran. It took one week for South Korea to go from 31 cases to over 1,000; and it took 12 days for Iran to go from zero cases to over 1,000. Using the data from the John Hopkins Coronavirus Resource Center, the confirmed cases are plotted over time for the six majorly affected countries . While China and South Korea are generally under control in March, the epicentre moved to Europe and the US. With the US leading the total number of confirmed cases, Italy has the highest fatality rate. Around the WHO's official announcement of a global pandemic, financial markets across the world have started to tumble. Taking the S&P 500 as an example, it reached its highest point on 19 February, 2020, but plunged to 2237.40 on 23 March, 2020, a fall of over 30% within one month. The standard deviation of daily returns in February was 0.0069; the number rises to 0.0268 in March. Not surprisingly, China has had the highest level of standard deviation in February and the lowest in March. The US’ market volatility has increased the most, with a level of standard deviation in March nearly four times higher than that in February. Interestingly, the standard deviation ranking in March is roughly consistent with the ranking of confirmed cases . It is clear that the pandemic has led to great risk and uncertainty in the global financial markets.
4 s-room/detail/30-01-2020-statement-on-the-second-meeting-of-the-international-health-regulations- -emergency-committee-regarding-the-outbreak-of-novel-coronavirus- The first task is to illustrate the relationship between stock market risks and the outbreak of COVID-19. Countries on the top 10 list of confirmed cases have been selected together with Japan, Korea and Singapore. Iran is excluded from this list, as its stock market data are not available. Together, these countries have had 466,693 cases ; they all have well-developed stock markets. Market risk is calculated using standard deviations of daily returns. The WHO declared PHEIC status in China on 30 January, 2020, so only February and March are considered in the present analysis. For most of February, China was the centre of the outbreak. While China successfully contained the virus from early March, the confirmed cases in Europe and the US have started to shoot up. global financial markets articles Confirmed cases in major affected countries. 1 speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19-11-march-2020 MST plots before and after the pandemic announcement. To give a first-hand description of the scenario and to understand the patterns of systemic risk in financial markets, this paper explores the available data and attempts to answer the following questions: How do risks in stock markets react to the pandemic outbreak? Do systemic risks increase worldwide? What are the potential impacts of policy interventions? Being a global health crisis, one would expect to see not only a rise in country-specific risks in stock markets, but also an increase in systemic risks. Here, correlations are used to illustrate the systemic reaction to the pandemic. Fig. 2 plots weekly return correlations among these 12 countries. They are calculated based on daily data within each week between February and March, totally eight observations. Try out PMC Labs and tell us what you think. Learn More . Using the WHO's announcement of a pandemic as a breaking point to separate the sample, two heat maps show the correlations before the announcement and after are plotted . While the US and the European stock markets keep high correlations in both cases, the four stock markets in Asia behave quite differently. While only China is somehow isolated from the world before the announcement, the whole Asia group is moving away from the Europe–US group. They become more connected after the announcement . For example, South Korea is highly correlated with China and Singapore after the announcement, but not before. 3 s/articles/2020-03-09/perfect-storm-is-plunging-asia-stocks-to-bear-markets-one-by-one Meanwhile, monetary authorities have implemented intensive policy measures to save these troubled financial markets. In the short-run, these policies may work as they have in the US – the unlimited QE has somehow stopped the panic of investors. However, these policies may create inconsistencies between investors’ short-term and long-term expectations . The US’ policies may introduce further uncertainty into the global markets and create trouble for emerging economies . Yang and Zhou  , for example, find that the US QE after the 2008 global financial crisis contributed significantly to the increased systemic risk at the time. The remainder of this paper is as follows. Section 2 provides a general description of the basic facts about the pandemic. Section 3 presents the statistical analysis of the data. Section 4 discusses the policy impacts. Section 5 concludes. Fig. 4 plots the MST for the case before the pandemic announcement and after. As can be seen in the left panel, before the announcement, European stock markets are strongly connected. France, Germany and the Netherlands are the core of the MST, with each one linking to three nodes. The US market and the China Mainland stock market are rather isolated in the system. Although the outbreak began in China, the international financial markets did not respond with any significant changes. On 11 March, 2020, the World Health Organization officially declared the coronavirus outbreak to be a global pandemic 1 . As of 27 March, 2020, the number of confirmed cases surpassed 500,000, and it continues to rise . Over 170 countries are affected, with the US has the most confirmed cases. The outbreak has had clear significant economic impacts. In the short-term, as many countries adopt strict quarantine policies, their economic activities are significantly limited. The longer-term consequences of this pandemic may arise from mass unemployment and business failures. Some industries, such as tourism and aviation, will certainly face hardships. Back to 2003, the severe acute respiratory syndrome was estimated to cost the world between 30–100 billion USD . While SARS was mainly in China, the COVID-19 pandemic has already become a worldwide crisis, behaving like “the once-in-a-century pathogen” . A much more profound impact to the global economy is expected. While the exact global economic impacts are not yet clear, financial markets have already responded with dramatic movements. In March 2020, the US stock market hit the circuit breaker mechanism four times in ten days. Since its inception in 1987, the breaker has only ever been triggered once, in 1997. Together with the US crash, stock markets in Europe and Asia have also plunged. FTSE, the UK's main index, dropped more than 10% on 12 March, 2020, in its worst day since 1987. 2 The stock market in Japan plunged more than 20% from its highest position in December 2019. 3 Central banks and authorities responded immediately by throwing their policy instruments into the market. For example, on 15 March, 2020, the Federal Reserve announced a zero-percent interest rate policy and at least a $700 billion quantitative easing program. Following the negative responses to this policy in the market, the FED announced an unlimited QE policy eight days later. Although most stock markets have recently begun rebounding, a great deal of uncertainty remains as the pandemic continues. Walter et al.  estimate that the coronavirus pandemic will potentially infect 7.0 billion people worldwide, causing 40 million deaths. Of course, this extreme case is only fictitious and come with the condition that no interventions are imposed. The lockdown of cities, border closures and many other health measures have already been implemented in over 136 countries , which should eventually slow and stop the pandemic. However, these policies will also lead to economic depressions around the world , and quickly spreading to financial markets . 8600 Rockville Pike , Bethesda MD , 20894 USA The statistics reported in Table 1 confirm that the pandemic has had a strong influence on stock markets. The risk levels of all the countries has increased substantially, from an average of 0.0071 in February to 0.0196 in March. Such dramatic movement cannot simply because of long-term expectations , instead, it is almost certain that sentimental factors play important roles. The market sentiment in response to the outbreak can be quickly amplified through social media, which then stimulate trade activities and cause extreme price movements . The rapid spread of coronavirus has dramatic impacts on financial markets all over the world. It has created an unprecedented level of risk, causing investors to suffer significant loses in a very short period of time. This paper aims to map the general patterns of country-specific risks and systemic risks in the global financial markets. It also analyses the potential consequence of policy interventions, such as the US’ decision to implement a zero-percent interest rate and unlimited quantitative easing , and to what extent these policies may introduce further uncertainties into global financial markets. b Institute of Science and Development, Chinese Academy of Sciences, Beijing 100190, China Based on the correlation analysis, the systemic connections among these countries is further investigated using graph theory and minimum spanning tree , a method that connects all the nodes in a graph with the minimum possible total edge weight and with no loops . Here, C is the correlation between two variables. Their distance can be calculated as