To what extent was volatility driven by fundamental versus behavioral factors during the COVID-19 crisis?

Sammanfattning

AbstractFinancial crises are often associated with sharp increases in stock market volatility, creating uncertainty for investors and financial markets. This study examines the drivers of stock market volatility during the COVID-19 pandemic, focusing on fundamental and behavioral factors. During the pandemic, financial markets were affected by increased uncertainty and large price movements. This raises the question of whether the changes in volatility could be explained by economic uncertainty or investor behavior. The study used the daily index value of the S&P 500 from a period before and during the COVID-19 pandemic. To analyze the volatility GARCH models were applied, which can be used to examine volatility clustering and asymmetric effects. The VIX index is used as a proxy for market uncertainty, while negative returns are used as a proxy for behavioral factors. The results indicate that the VIX index is positive and has a statistically significant relation to volatility, while the variables for behavior do not show any statistical significance. The EGARCH model indicates asymmetric effects where negative news affects volatility more than positive news.Overall the finding suggests that volatility during COVID-19 shows stronger support that market uncertainty was behind the volatility changes during the COVID-19 pandemic, even though some behavioral elements can not be ruled out.