Quarterly Publication

Document Type : Original Article

Authors

1 Assistant Professor, Visiting Professor, York University, faculty of Liberal Art, Email: m.baky@isu.ac.ir,mbaky@yorku.ca

2 M.S. Student, Financial Engineering, Khaje Nassir Toosi University, Tehran, Iran.

3 M.S. Student, Financial Engineering, Khaje Nassir Toosi University, Tehran, Iran

4 Assistant Professor, Islamic Azad University, West Tehran Branch, Faculty of Humanities, Department of Accounting, Tehran, Iran.

Abstract

The goal of this paper is to study the effect of Covid-19 outbreak on oil markets volatility.Covid-19 as a pandemic has a significant negative effect on global economy.  Alongside the global economy, stock markets responded to the outbreak immediately. The first case appeared in February 20 in Iran.  The outbreak has different implication for Iranian economy. Using daily data on return of oil companies registered at Tehran Stock Exchange (TSE), change in new cases integrated into the E-GARCH model as a proxy for the virus outbreak form February 20, 2020 until December 12, 2020, it applies an E-GARCH model to derive volatilities in index. To test the effect of Covid-19 outbreak on the volatilities in oil companies’ index, change in daily new cases integrated into the E-GARCH model as a proxy for the virus outbreak. The results show that, despite of fresh money pumped into the market and increase in market transactions and volume of trade, during the first phase of outbreak, Covid-19 has negatively affected returns of oil companies’ prices.

Keywords

Main Subjects

Akhtaruzzaman, M., Boubaker, S., Chiah, M., &Zhong, A. (2020). COVID_19 and Oil Price Risk Exposure. Journal ofFinance Research Letters. (https://doi.org/10.1016/j.frl.2020.101882)
Al-Awadhi, A.M., Alsaifi. K., Al-Awadhi,A., &Alhammadi, S. (2020). Death and Contagious Infectious Diseases: Impact of the COVID-19 Virus on Stock Market Returns. Journal of Behavioral and Experimental Finance.  (https://doi.org/10.1016/j.jbef.2020.100326).
Alfaro, L., Chari, A., Greenland, A., & Schott, P.K. (2020). Aggregate and Firm-level Stock Returns during Pandemics, in Real Time.
Ashraf, B.N. (2020). Stock Markets’ Reaction to COVID-19: Cases or fatalities? Journal of Research in International Business and Finance. (https://doi.org/10.1016/j.ribaf.2020.101249).
Ashraf, B.N. (2020). Economic Impact of Government Interventions during the COVID-19 Pandemic: International Evidence from Financial Markets. Journal of Behavioral and Experimental Finance. (https://doi.org/10.1016/j.jbef.2020.100371).
Baker, S.R., Bloom, N., Davis, S.J., & Terry, S.J. (2020). Covid-induced Economic Uncertainty. Journal of National Bureau of Economic Research.
Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroscedasticity, Econometrics, 31, Pages: 307–327.
Bollerslev, T. (1987).A Conditional Heteroskedastic Ttime Series Model for Speculative Prices and Rates of Return. Review of Economics and Statistics, 69, Pages: 542–547.
Bollerslev, T., &Ghysels, E. (1996). Periodic Autoregressive Conditional heteroskedasticity. Journal of Business and Economic Statistics, 14, Pages: 139–157.
Campbell, J., Lo, A., &MacKinlay, A.C. (1997). The Econometrics of Financial Markets.Princeton, NJ: Princeton University Press.
Corbet, S., Hou, Y., Hu, Y., Lucey, B., & Oxley, L. (2020). Aye Corona! The Contagion Effects of Being Named Corona during the COVID-19 Pandemic. Journal of Finance Research Letters. (https://doi.org/10.1016/j.frl.2020.101591).
Dickey, D.A., & Fuller, W.A. (1979). Distribution of the Estimators for Autoregressive Time Series with a unit root. Journal of the American Statistical Association. (https://doi.org/10.2307/2286348).
Engle, R.F. (1982). Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of United Kingdom Inflation, Econometrica Vol. 50, No. 4 (Jul., 1982), Ages: 987-1007.
Engle, R.F. (Ed.). (1995). ARCH: Selected Readings. Oxford: Oxford University Press.
Engle, R.F., Lilien, D.M., & Robins, R.P. (1987). Estimating Time Varying Risk Premium in the Term Structure: The ARCH-M model. Econometrica, 55, Page: 391–407.
Fuller, W. A. (1976). Introduction to Statistical Time Series. John Wiley and Sons. New York.
Gharib, C., Mefteh-Wali, S., &Jabeur, S.B. (2020). The Bubble Contagion Effect of COVID-19 outbreak: Evidence from Crude Oil and Gold Markets. Journal OfFinance Research Letters. (https://doi.org/10.1016/j.frl.2020.101703).
Ghazani, M.M., &Ebrahimi, S.B., (2019). Testing the Adaptive market hypothesis as an Evolutionary Perspective on Market Efficiency: Evidence from the Crude Oil Prices. Journal of Finance Research Letters. (https://doi.org/10.1016/j.frl.2019.03.032).
Glosten, L., Jagannathan, R., &Runkle, D. (1993). On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks. Journal of Finance, 48, 1779–1801.
Gunay, S. (2020). A New form of Financial Contagion: COVID -19 and Stock Market Responses. Available at (http://dx.doi.org/10.2139/ssrn.3584243).
Harpan, H., Itoh, N., Yufika, A., Winardi, W., Keam, S.,Te, H., Megawati, D., Hayati, Z., Wagner, A.L., & Mudatsir, M. (2020). Coronavirus Disease 2019 (COVID-19): A Literature Review. Journal of Infection and Public Health. (https://doi.org/10.1016/j.jiph.2020.03.019).
Hidenori, T., Kazuo, Y. (2020). When the Japanese Stock Market Meets COVID-19: Impact of Ownership, China and US Exposure, and ESG Channels. (http://dx.doi.org/10.2139/ssrn.3577424)
Ichev, R., &Marinč, M. (2018). Stock prices and Geographic Proximity of Information: Evidence from the Ebola Outbreak. Journal of International Review of Financial Analysis. , (https://doi.org/10.1016/j.irfa.2017.12.004).
Kariya, K., Giri,N.C,.  And Perron, F. (1989). Equivariant Estimation of a Mean vector μ of N (μ,Σ) with μ′Σ-1 μ = 1 or Σ-1/2= c or Σ= σ2μ′μl. Journal of Multivariate Statistics and Probability. (https://doi.org/10.1016/B978-0-12-580205-5.50025-2).
Kirkpatrick, D.D., Fassihi, F., &Mashal, M. (2020). Recipe for a Massive Viral Outbreak: Iran Emerges as a Worldwide Threat. The Newspaper the New York Times. (https://www.nytimes.com/2020/02/24/world/middleeast/coronavirus-iran.html).
Lahmiri, S., &Bekiros, S. (2020). The impact of COVID-19 Pandemic upon Stability and Sequential Irregularity of Equity and Cryptocurrency Markets. Journal of Chaos, Solitons and Fractals. (https://doi.org/10.1016/j.chaos.2020.109936).
Lilien, D.M., & Robins, R.P. (1987). Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model. (http://links.jstor.org/sici?sici=0012-9682%2819870 ... O%3B2-X&origin=repec).
Liu, Q., &Morimune, K. (2005). A Modified GARCH Model with Spells of Shocks. Asia-pacific Financial Markets, 12(1), 29–44.
Mazur, M., Dang, M., & Vega, M. (2020). COVID-19 and the March 2020 Stock Market Crash. Evidence from S&P1500. Journal of Finance Research Letters. (https://doi.org/10.1016/j.frl.2020.101690).
Mensi, W., Sensoy, A., VO, X.V., & Kang, S.H. (2020). Impact of COVID-19 Outbreak on Asymmetric Multifractality of Gold and Oil Prices. Journal of Resources Policy. Available Online 12 August 2020. (https://doi.org/10.1016/j.resourpol.2020.101829).
Nelson, D. (1990a). Stationarity and Persistence in the GARCH(1,1) Model. Econometric Theory, Vol. 6, No. 3, Pages: 318-334.
Nelson, D. (1990b). ARCH models as Diffusion Approximations. Journal of Econometrics, Volume 45, Issues 1–2, July–August 1990, Pages: 7-38.
Nelson, D. (1991). Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica, 59, 347–370.
Okorie, D,I., & Lin, B. (2020). Stock Markets and the COVID-19 Fractal Contagion Effects. Journal of Finance Research Letters. (https://doi.org/10.1016/j.frl.2020.101640).
Shehzad, K., Xiaoxing, L., &Xiaoxing, H. (2020). COVID-19’s Disasters are Perilous than Global Financial Crisis: A Rumor or fact? Journal of Finance Research Letters. (https://doi.org/10.1016/j.frl.2020.101669).
Thomas, H., Webster, S., Petherick, A., Phillips, T., & Kira, B. (2020) - "Oxford COVID-19 Government Response Tracker", Blavatnik School of Government. Published Online at Covidtracker.bsg.ox.ac.uk. Retrieved from: https://covidtracker.bsg.ox.ac.uk.
Tsay, R. (2002). Analysis of Financial Time Series. New York: John Wiley & Sons Inc.
Wang, K.L., Fawson, C., Barrett, C.B. & McDonald, J.B. (2001). A Flexible Parametric GARCH Model with an Application to Exchange Rates. Journal of Applied Econometrics.
Wang, L, Liu, J., Li, X., Shi, J., Hu, J., Cui, R., Zhang, Z.L., Pang D.W., &Chen, Y. (2011). Growth Propagation of Yeast in Linear Arrays of Microfluidic Chambers Over Many Generations. Biomicrofluidics 5(4):44118-441189.
World Bank Group. (2020). Commodity Markets Outlook—Persistence ofCommodity Shocks, October. World Bank, Washington, DC. License: Creative Commons Attribution CC BY 3.0 IGO.
Zhang, D., Hu, M., &Ji, Q. (2020). Financial Markets under the Global Pandemic of COVID-19. Journal of Finance Research Letters. (https://doi.org/10.1016/j.frl.2020.101528).