Global evidence of the COVID-19 shock on real equity prices and real exchange rates: A counterfactual analysis with a threshold-augmented GVAR model

• Published in: Finance research letters 2022-06, Vol.47, p.102519-102519, Article 102519
• Main Authors: Salisu, Afees A., Ayinde, Taofeek O., Gupta, Rangan, Wohar, Mark E.
• Format: Article
• Language: English
• Subjects: COVID-19; Financial markets; Threshold-GVAR
• ISSN: 1544-6123; 1544-6131; 1544-6131
• DOI: 10.1016/j.frl.2021.102519

•The effect of COVID-19 pandemic on real equity prices and real exchange rates is examined.•A multi-country Threshold-Augmented Global Vector Autoregressive Model is estimated.•The real equity prices across countries (except the United States) and country groupings responded negatively to the pandemic with the highest negative impact recorded in 2020Q2.•The reduced stock prices globally (except the US) in 2020Q2 produced real exchange rate depreciation in the Euro Area and Advanced Economies’ panels in relation to the US.•The results support the effectiveness of the quantitative easing policy regime in the Euro Area during the COVID-19 pandemic In this study, we offer a global perspective on the impacts of the COVID-19 pandemic on financial markets using a multi-country Threshold-Augmented Global Vector Autoregressive Model of Chudik et al. (2020). We document a negative impact of the pandemic on real equity prices across countries (except the United States) and country groupings with the highest negative impact recorded in 2020Q2. The biggest losers are the emerging economies while the biggest gainers are the United States whose real stock prices remain positive and the Euro Area that achieved real exchange rate appreciation when the financial markets were mostly vulnerable. Our results support the effectiveness of the quantitative easing policy regime in the Euro Area during the COVID-19 pandemic and also suggest hedging role for the US stocks among other suggested safe assets.