Infectious disease pandemic and permanent volatility of international stock markets: A long-term perspective

Highlights

• •

  EMV-ID tracker is used to measure the infectious disease pandemic.

• •

  GARCH-MIDAS is adopted to model the impacts of EMV-ID on stock market volatility.

• •

  Lagged realized volatility and economic policy uncertainty are used as controlling variables.

• •

  Infectious disease pandemic imposes significant positive impact on stock market volatility.

• •

  Infectious disease pandemic has the smallest impact on permanent volatility of China's stock market.

Abstract

Understanding the impact of infectious disease pandemic on stock market volatility is of great concerns for investors and policy makers, especially during recent new coronavirus spreading period. Using an extended GARCH-MIDAS model and a newly developed Infectious Disease Equity Market Volatility Tracker (EMV-ID), we investigate the effects of infectious disease pandemic on volatility of US, China, UK and Japan stock markets through January 2005 to April 2020. The empirical results show that, up to 24-month lag, infectious disease pandemic has significant positive impacts on the permanent volatility of international stock markets, even after controlling the influences of past realized volatility, global economic policy uncertainty and the volatility leverage effect. At different lags of eruptions in infectious disease pandemic, EMV-ID has distinct effects on various stock markets while it has the smallest impact on permanent volatility of China's stock market.