Randomness, Informational Entropy, and Volatility Interdependencies among the Major World Markets: The Role of the COVID-19 Pandemic

Abstract

The main purpose of our paper is to evaluate the impact of the COVID-19 pandemic on randomness in volatility series of world major markets and to examine its effect on their interconnections. The data set includes equity (Bitcoin and Standard and Poor’s 500), precious metals (Gold and Silver), and energy markets (West Texas Instruments, Brent, and Gas). The generalized autoregressive conditional heteroskedasticity model is applied to the return series. The wavelet packet Shannon entropy is calculated from the estimated volatility series to assess randomness. Hierarchical clustering is employed to examine interconnections between volatilities. We found that (i) randomness in volatility of the S&P500 and in the volatility of precious metals were the most affected by the COVID-19 pandemic, while (ii) randomness in energy markets was less affected by the pandemic than equity and precious metal markets. Additionally, (iii) we showed an apparent emergence of three volatility clusters: precious metals (Gold and Silver), energy (Brent and Gas), and Bitcoin and WTI, and (iv) the S&P500 volatility represents a unique cluster, while (v) the S&P500 market volatility was not connected to the volatility of Bitcoin, energy, and precious metal markets before the pandemic. Moreover, (vi) the S&P500 market volatility became connected to volatility in energy markets and volatility in Bitcoin during the pandemic, and (vii) the volatility in precious metals is less connected to volatility in energy markets and to volatility in Bitcoin market during the pandemic. It is concluded that (i) investors may diversify their portfolios across single constituents of clusters, (ii) investing in energy markets during the pandemic period is appealing because of lower randomness in their respective volatilities, and that (iii) constructing a diversified portfolio would not be challenging as clustering structures are fairly stable across periods.

Covid-19, Dow Jones and equity market movement in ASEAN-5 countries: evidence from wavelet analyses

“…Using wavelet packet transform domain to calculate the Shannon entropy, the original signal or information will not be lost. Lahmiri and Bekiros (2020a , 2020b) study the entropy of major world market and Bitcoins, Silver, WTI, Brent, Gold, Gas, S&P500 using Shannon and Renyi entropies. Lahmiri and Bekiros (2020a) cite the work of Shannon (1948) for Shannon entropy to analyse the measure of disorder (or order) of the wavelet packet transformation.…”

“… Lahmiri and Bekiros (2020a , 2020b) study the entropy of major world market and Bitcoins, Silver, WTI, Brent, Gold, Gas, S&P500 using Shannon and Renyi entropies. Lahmiri and Bekiros (2020a) cite the work of Shannon (1948) for Shannon entropy to analyse the measure of disorder (or order) of the wavelet packet transformation. This section heavily depends on Lahmiri and Bekiros (2020a) 's citing the work of Li and Zhou (2016) .…”

“… Lahmiri and Bekiros (2020a) cite the work of Shannon (1948) for Shannon entropy to analyse the measure of disorder (or order) of the wavelet packet transformation. This section heavily depends on Lahmiri and Bekiros (2020a) 's citing the work of Li and Zhou (2016) . The wavelet transformation for Shannon entropy is recursively calculated as follows: where h(k) is a high-pass filter, g(k) is a low-pass filter, and d i,j are coefficients of the wavelet packet transform at the i th level for the j th node.…”

“…Increasing number of studies are looking at the financial effects of the COVID-19 pandemic on the international financial markets and economies using multitude of econometrics analyses and methodologies ( Ashraf, 2020 ; Ibrahim et al., 2020 ; Lahmiri and Bekiros, 2020a ; Sharif et al., 2020 ; Zhang et al., 2020 ). From traditional time series econometrics to a more contemporary wavelet analyses and entropy, the COVID-19 pandemic had adversely affected many aspects of the financial, economic and social dimension in a very short span of time.…”

“…At the point of writing, many countries are being hit by the second and third waves with different mutation of COVID-19 strains which make it impossible to produce the vaccines for every variant. Equity markets reacted rapidly at several junctures during the pandemic outbreaks ( Akhtaruzzaman et al., 2020 ; Ali et al., 2020a ; Ashraf, 2020 ; Lahmiri and Bekiros, 2020a ; Mzoughi et al., 2020 ; Zhang et al., 2020 ).…”