You sneeze, and the markets are paranoid: the fear, uncertainty and distress sentiments impact of the COVID-19 pandemic on the stock–bond correlation
ISSN: 1526-5943
Article publication date: 28 September 2022
Issue publication date: 31 October 2022
Abstract
Purpose
This paper investigates the influence of three different sentiment indicators on the time-varying stock–bond correlation of 15 countries during the global crisis period of the coronavirus disease 2019 (COVID-19) pandemic.
Design/methodology/approach
The author uses the time-varying correlation estimated using the autoregressive moving average -dynamic conditional correlation - generalised autoregressive conditional heteroskedasticity (ARMA-DCC-GARCH) model to achieve this aim. The impact of investor sentiment on the stock–bond correlation was analysed using the Markov regime-switching regression.
Findings
The study results show that the sentiment indicators of fear, uncertainty and distress have a pronounced negative impact on the stock–bond correlation. They further provide evidence of a strong regime effect on the stock–bond correlation with sentiment indicators.
Practical implications
The paper has a relevant impact on policymakers and fund managers. First, the policymakers now have more insightful evidence of how the stock and bond markets react during crises. Second, the fund managers need to focus on behavioural variables as they may be driving factors in crisis periods that may impair portfolio management.
Originality/value
To the best of my knowledge, the paper is the first to throw light on the behaviour of the stock–bond correlation for 15 countries during the COVID-19 period.
Keywords
Acknowledgements
The author is grateful to receive valuable comments and suggestions from the Editor and the reviewers, which has to improve upon the earlier version of the paper.
Citation
Banerjee, A.K. (2022), "You sneeze, and the markets are paranoid: the fear, uncertainty and distress sentiments impact of the COVID-19 pandemic on the stock–bond correlation", Journal of Risk Finance, Vol. 23 No. 5, pp. 652-668. https://doi.org/10.1108/JRF-04-2022-0095
Publisher
:Emerald Publishing Limited
Copyright © 2022, Emerald Publishing Limited