Dynamic spillovers between energy and stock markets and their implications in the context of COVID-19

• Published in: International review of financial analysis 2021-10, Vol.77, p.101828-101828, Article 101828
• Main Authors: Zhang, Hua, Chen, Jinyu, Shao, Liuguo
• Format: Article
• Language: English
• Subjects: COVID-19; Hedge ability; Network analysis; Spillover effects; TVP-DY model
• ISSN: 1057-5219; 1873-8079; 1873-8079
• DOI: 10.1016/j.irfa.2021.101828

This study combined time-varying parameter vector autoregression (TVP-VAR) and a spillover index model to analyze the static, total, and net spillover effects of energy and stock markets before and after the COVID-19 outbreak. A network method was also used to depict structural changes more intuitively. Furthermore, we calculated and compared changes in the hedge ratio, optimal portfolio weights, and hedge effectiveness to guide investors to adjust portfolio strategies during COVID-19. The main findings were as follows: First, COVID-19 had a significant impact on spillover effects, and the average value of total spillover index increased by 19.94% compared with that before the epidemic. Second, the energy market was an important risk recipient of the stock market before COVID-19, and the extent of risk acceptance increased after the COVID-19 outbreak. Third, the hedging ratio, optimal portfolio weights, and hedge effectiveness showed huge changes after the COVID-19 outbreak, requiring investors to adjust their portfolio strategies. •The impact of COVID-19 on spillover effects was detected.•The changes of hedge ability were compared under the effect of COVID-19.•Dynamic spillover was measured by TVP-VAR and DY spillover index model.•Dynamic spillovers and hedge ability were affected by COVID-19 seriously.