To what extent does COVID-19 drive stock market volatility? A comparison between the U.S. and China

• Main Authors: Xue Gao, Yixin Ren, Muhammad Umar
• Format: Article
• Language: English
• Published: Taylor & Francis Group 2021-03-01
• Series: Ekonomska Istraživanja
• Subjects: stock volatility; covid-19; quantile-on-quantile; wavelet transform
• Online Access: http://dx.doi.org/10.1080/1331677X.2021.1906730
• ISSN: 1331-677X; 1848-9664

This paper presents a novel wavelet-based quantile-on-quantile method for comparing the impact of COVID-19 on stock market volatility between the U.S. and China. Wavelet decomposition shows that the impact has stronger regularity in the lower frequency domain. Compared with oil price fluctuations, COVID-19 is the main reason for the sharp fluctuation of the U.S. stock market. Unlike China, however, the strong growth of daily new cases, which continued for months, has made the U.S. stock market insensitive to COVID-19. In addition, the particularly loose interest rate policy has effectively suppressed the volatility of the U.S. stock market. However, in contrast to China, the near zero interest rate applied by the U.S. makes it difficult to generate sufficient monetary policy space to address a new potential crisis. The result of this study presents the differences of the financial market response under different epidemic management modes. Under the background that COVID-19 is not effectively controlled, a loose monetary policy may be an expedient measure to stabilise the market. This is of great practical significance towards achieving epidemic control and financial market stability under the background of the global spread of COVID-19.