COVID-19 as Information Transmitter to Global Equity Markets: Evidence from CEEMDAN-Based Transfer Entropy Approach

Abstract

This study provides an analysis of chaotic information transmission from the COVID-19 pandemic to global equity markets in a novel denoised frequency domain entropy framework. The current length of the pandemic data offers the opportunity to examine its role in the asymmetric behaviour patterns of investors according to time horizons and the diversification potentials available to them. We employ the total daily global confirmed cases of COVID-19 and 27 equity indices from December 31, 2019, to April 18, 2021. Our results corroborate the idea that diversification potentials are stronger in the short to medium term. The Global Index (higher risk) and Canada and New Zealand (lower risk) remain at both ends to pair some other equities to offer diversification prospects because of the transmission of information from COVID-19 to the selected equity markets. In addition, we provide the source of these diversification prospects as information flow rather than transmission of shocks, which is common in the literature. Furthermore, our results suggest detailed levels of risk (lower vis-à-vis higher) in the situation where they have been stripped of the noise in the market. The findings allow both investors and policymakers to make informed decisions based on the time horizons since the pandemic communicates different chaotic information with the lapse of time. This is imperative to avoid the negative consequences of the increasing infection rate on global stock markets.

Spillovers and contagion between BRIC and G7 markets: New evidence from time-frequency analysis

“…All G7 markets except Japan were found to be net transmitters of shocks in the mid-to-long-term periods. The findings suggest that the nature of spillovers across and within the BRIC and G7 markets is time-frequency-dependent, which is consistent with the HMH [ 23 – 25 ] the AMH [ 22 ], and the CMH [ 34 ]. This observation accentuates the conclusion of Mensi et al [ 60 ] who revealed that volatility spillovers among Islamic and BRICS equities were time-frequency-dependent.…”

“…Furthermore, although information travels across markets as a consequence of investor queries, information flows become more intense during times of market stress. This situation exemplifies Owusu Junior, Frimpong et al’s [ 34 ] competitive market hypothesis (CMH), which states that the intensity of information flows and spillover between markets of the same and different asset classes is exacerbated in part by rational, albeit rather irrational, investors’ never-ending search for competing rewards and risks to meet portfolio goals.…”

“…In responding to such a negative signal, all responses in the short term are attributable to transitory factors, which are likely to affect cross-market correlations [ 65 , 66 ], which then causes a significant change in the fundamental connectedness between developed and developing markets. Owusu Junior, Frimpong et al [ 34 ], Bossman [ 23 ], and Bossman [ 24 ] note that market dynamics and connectedness in the medium- (long-) term are attributable to key events (fundamental factors). In the medium term, key events in the market also drive the connectedness between assets and such connectedness could last throughout the event.…”

“…Heterogeneous and time-based investor behaviour is reflected in market pricing since the market does not function in solitude. Theories that support this occurrence are Lo’s [ 22 ] AMH and the HMH recently propagated by Adam, Gyamfi, Kyei, Moyo, and Gill [ 25 ], Bossman [ 23 ], Bossman et al [ 24 ], and Owusu Junior, Frimpong et al [ 34 ]. By analysing historical and present events, the HMH hypothesises that distinct economic actors make investment decisions over different time horizons depending on their risk and return preferences.…”

“…In a static spillover paradigm, Zhang et al [ 27 ] analyse the connectedness of G7 and BRIC economies. However, the operability of markets and investor behaviour are shown to follow dynamic patterns and, hence, evidence from static connectedness measures may be insufficient for time-based investors operating across the short-, medium-, and long-term periods [ 5 , 11 , 23 – 25 , 34 ]. Analysis of safe-haven assets [ 39 ], risk-aversion comovements [ 40 ], spillovers dynamics between developed and emerging economies, and commodity futures [ 28 ] have all been studied with much emphasis on G7 markets and to some extent, BRIC economies.…”