FINANCIAL CONTAGION BEFORE AND DURING THE COVID-19 MEDICAL SHOCK

Abstract

Using a spillover index measure and wavelet tools, this paper investigates the connectedness among the stock markets of the G7 countries and China before and during the COVID-19 medical shock period. Results suggest that, while the time-varying spillover fluctuates at a relatively high level, which is consistent with the ongoing increase in market integration due to liberalization and increasing mobility of capital, it suggests that the degree of market integration exhibits different patterns over time, and far exceeds 80% level during the COVID-19 medical shock. Similarly, wavelet-coherencies between stock market returns exhibit different patterns over the entire sample period and across different frequencies, indicating that the interdependence between the considered stock markets has evolved over time. More interestingly, the further details given by the wavelet coherencies not only highlight a significant contagion effect between the G7 stock markets in times of crisis, but also indicate that the intensity of the interdependence between these markets is more persistent in times of stress. Moreover, in non-crisis periods, the linkages between the Chinese and the G7 stock markets are broadly low and insignificant at almost all frequencies, while they become clearer at long-run frequencies in case of systemic shocks. In other words, this result suggests that the Chinese stock market is somehow “isolated”, whereas the G7 markets are highly integrated with each other.
JEL Classification: C32, F42, G15.