article · Research in International Business and Finance
A Markov-switching framework was applied to examine the time-varying and regime-shifting relationships between the COVID-19 pandemic and United States stock markets. Fluctuations in daily reported infections and cumulative fatalities created asymmetric left and right tail dependence with equity markets, with these dependencies altering significantly over time. Both upper and lower tail dependencies showed distinct regime-switching dynamics. After 1 December 2019, the likelihood of shifting into a higher tail dependence phase was consistently greater than moving into a lower tail dependence phase. Financial markets demonstrated significant and concurrent reactions to the unexpected emergence of the transmissible respiratory disease. Because comparable dynamics occur during unexpected natural calamities or health emergencies, these findings illustrate how market vulnerability shifts under severe crisis conditions.
Understanding how financial markets respond to sudden health emergencies helps analysts anticipate severe market movements. By demonstrating that stock market linkages shift into distinct, higher-dependence regimes during an outbreak, this research provides policymakers and financial market participants with clearer evidence on how systemic vulnerabilities behave during unexpected public health crises or natural disasters.
The abstract does not specify an explicit commercialisation pathway or dedicated tool. The findings could conceptually inform risk management systems, volatility forecasting models, or stress-testing frameworks used by institutional investors, asset managers, and financial regulators. At present, the work represents early-stage empirical research requiring translation into applied financial analytics software before real-world adoption is possible.
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This paper aims to investigate the regime-switching and time-varying dependence between the COVID-19 pandemic and the US stock markets using a Markov-switching framework. It makes two contributions to the empirical literature by showing that: (a) the variations of the daily reported COVID-19 cases and cumulative COVID-19 deaths induced asymmetric lower (left) and upper (right) tail dependence with the stock markets, and its left and right tail dependence exhibited significant time-varying trends; and (b) the left and right tail dependence between the stock markets and the pandemic exhibited significant regime-switching behaviours, with its switching probabilities in the higher tail dependence stage all being greater than in the lower tail dependence stage after 1 December 2019. Moreover, given that there is concurrent but significant financial market reaction to any unexpected emergence of a transmittable respirational disease or a natural calamity, the outcomes have some vital implications to market players and policymakers.
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DOI: 10.1016/j.ribaf.2023.101882
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