Journal of Business Research 128 (2021) 31–44

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Journal of Business Research

journal homepage: www.elsevier.com/locate/jbusres

The effect of COVID – 19 pandemic on global stock market volatility: Can

economic strength help to manage the uncertainty?
Moshfique Uddin a, *, Anup Chowdhury b, Keith Anderson c, Kausik Chaudhuri a
a
Leeds University Business School, University of Leeds, Leeds LS2 9JT, UK
b
Leeds Business School, Leeds Beckett University, Leeds LS1 3HE, UK
c
The York Management School, University of York, York YO10 5GD, UK

A R T I C L E I N F O A B S T R A C T

Keywords: Stock markets across the world have exhibited varying degrees of volatility following the recent COVID-19
COVID-19 pandemic. We have examined the effect of this pandemic on stock market volatility and whether economic
Stock Market Volatility strength, measured by a set of selected country-level economic characteristics and factors such as economic
Economic Resilience
resilience, intensity of capitalism, level of corporate governance, financial development, monetary policy rate
Capitalism
Financial Development
and quality of health system, can potentially mitigate the possible detrimental effect of the global pandemic on
Corporate Governance stock market volatility. Using data from 34 developed and emerging markets, we have found that these country-
level economic characteristics and factors do help to reduce the volatility arising due to the virus pandemic. The
results of this paper are important as policymakers can use these economic factors to set policy responses to
tackle extraordinary heat in the global stock market in order to avoid any possible future financial crisis.

1. Introduction thousands of people1. The shock and panic have caused severe falls in
stock markets around the world. The BBC reported on 31st March 2020
The COVID-19 pandemic has affected almost every aspect of human that the Dow Jones Industrial Average and FTSE 100 had plunged by
life and the economy and has been labelled as a black swan event due to 23% and 25%, respectively – the biggest quarterly drops since 1987. The
its sudden and severe nature (Verma & Gustafsson, 2020). Stock markets S&P 500 also lost 20% during the same time, which was the worst loss
across the world have exhibited varying degrees of volatility following since the 2008 financial crisis. Economists made stark warnings about
the pandemic. Our aim in this paper is dual: first to analyse quantita­ the sharp global slowdown. Global Economic Prospects (June 2020)2
tively to what extent the surge in volatility can be attributed to COVID- reported that the pandemic would drag the majority of world economies
19 and then to examine whether the relevant economic factors such as into recession and global per capita output contraction would be the
economic resilience, intensity of capitalism, level of corporate gover­ largest since 1870. The report also pointed out that the global contrac­
nance, financial development and level of health system development tion in real GDP would be 5.2%. The figures for advanced economies and
may reduce the already existing turmoil in the stock market to some emerging and developing economies would be 7% and 2.5%, respec­
extent so that a potential crisis following this extraordinary heat in tively. A recent report by Deloitte3 stated that the COVID-19 pandemic
global stock markets could be avoided in future. has affected both the supply and demand sides of the global economy. In
The world has been experiencing a severe pandemic caused by addition to significant numbers of infections and deaths, the global
COVID-19, which is an acute respiratory disease that originated in China economy has been suffering very severely in many ways, such as a fall in
and now has spread through the world and already killed hundreds of bond yields, and a sharp drop in oil prices and stock markets, along with

* Corresponding author.
E-mail addresses: [email protected] (M. Uddin), [email protected] (A. Chowdhury), [email protected] (K. Anderson), k.
[email protected] (K. Chaudhuri).
1
As of 29th January 2021, there were over 102 million people affected globally and over 2.2 million people died since the first COVID-19 case was detected in
November 2019 in China.
2
Global Economic Prospects published in June 2020 by World Bank Group (DOI: https://doi.org//10.1596/978-1-4648-1553-9).
3
Baret, S., Celner, A., O’Reilly, M. and Shilling, M. (2020). COVID-19 potential implications for the banking and capital markets sector. Deloitte Center for
Financial Services.

https://doi.org/10.1016/j.jbusres.2021.01.061
Received 5 June 2020; Received in revised form 29 January 2021; Accepted 31 January 2021
Available online 11 February 2021
0148-2963/© 2021 Elsevier Inc. All rights reserved.
M. Uddin et al. Journal of Business Research 128 (2021) 31–44

a potential liquidity crisis at both the institutional and individual levels. weaker economic resilience suffers up to twice the output loss in a given
Baker, Bloom et al. (2020), Baker, Bloom, Davis, and Terry (2020) re­ year due to exogenous economic shocks compared to a country with
ported that, in the US stock market, there were 18 market jumps be­ stronger economic resilience. Comparing the performance of a group of
tween 24th February and 24th March 2020 (a total of 22 trading days). OECD countries in facing common economic shocks, Duval and Vogel
This is more than any other period in history with the same number of (2008) conclude that the countries that are more resilient performed
trading days. The authors also reported that the volatility increase in US better in managing the economic shocks. Didier, Hevia, and Schmukler
markets due to the COVID-19 outbreak is much bigger than any other (2012) and Abiad, Bluedorn, Guajardo, and Topalova (2015) conclude
past events such as global influenza in 1918, SARS in 2003 or Ebola in the same, using data from emerging countries and developing econo­
2015. The COVID-19 outbreak created a significant amount of fear and mies. In this study, we have examined whether the level of economic
uncertainty due to its rapid contamination and high death rates. More­ resilience of selected sample countries helps mitigate the effect of the
over, both demand and supply shocks have created panic in financial global pandemic on stock market volatility. Economic resilience is
markets. This has increased the severity of stock market volatility, as measured using 12 different economic drivers. Details of these drivers
Engle and Ng (1993) found that negative return shocks influence vola­ are provided in Table 1.
tility more than positive return shocks. Borjigin, Gao, Sun, and An The second factor is the intensity of capitalism. In general, capitalism
(2020) also find evidence of the stronger effect of negative news on is defined as an economic system where trade and industry are owned
market volatility compared to good news. Falling stock prices across the and controlled by private owners for profit rather than by the state.
world mean that markets become more volatile due to the leverage ef­ According to Hodgson (2016), capitalism is a socio-economic system
fect – a drop in stock value leads to an increase in financial leverage. This where the legal system supports individual property rights, commodities
eventually makes the stock riskier and increases volatility (Black, 1976; are exchanged that involves money, the private ownership of production
Christie, 1982). Moreover, using the volatility feedback effect, Ander­ to earn profit, and a developed financial system with banking in­
son, Bollerslev, Diebold, and Ebens (2001) stated that asymmetry be­ stitutions to facilitate credit and debt. When capitalism is in place to
tween stock market returns and volatility is stronger with negative solve an economic problem, the capital market plays a pivotal role in the
returns rather than positive returns. allocation of capital (Gordon, 2005). Bakshi and Chen (1996) included
Examining volatility is important as a sudden and significant in­ wealth in the utility function in addition to consumption. This plausibly
crease in volatility may lead to a financial crisis. Danielsson, Valenzuela, following the spirit of capitalism as the inclusion of wealth in the utility
and Zer (2018) pointed out that unusual levels of financial market function increases risk aversion by investors and reduces the demand for
volatility increase the likelihood of a subsequent financial crisis. When risky assets. As such, there is a possibility that capitalism discourages
the actual financial market volatility deviates from an expected level, risky investments during volatile times and contributes to reducing the
that essentially affects economic decisions (Keynes, 1936; Hayek, 1960). heat of the market. This study examines whether the aggregate capi­
In this vein, Baker, Nicholas, and Davis (2016) and Gulen and Ion (2016) talism score of sample countries helps to explain the mitigation of stock
find that higher levels of stock market volatility will have a detrimental market volatility arising due to the global pandemic. The study uses
effect on investment, output and employment and increase policy un­ aggregate capitalism scores available at the Heritage Foundation and the
certainty. Similarly, Engle, Ghysels, and Sohn (2013) show that higher World Population Review database. Details about the capitalism scores
volatility increases output and inflation uncertainty. Using real option are provided in Table 1.
theory, Dixit and Pindyck (1994) show that uncertainty increases the Corporate governance is another important issue that may have a
value of the option to invest later. This essentially means that there is a direct impact on market volatility. Huang, Chan, Huang, and Chang
scarcity of resources to maintain the required levels of investment in (2011) state that corporate governance is the way that firms supervise
uncertain times. Wu (2001) stated that the leverage effect and feedback and control corporate activities. Although minimising the agency
effect of asymmetric volatility can recur and damage stock values problem is the main objective of corporate governance, other core ob­
significantly, which might lead to a stock market crash. Other authors jectives include protecting minority shareholders from expropriation by
who have examined the link between higher volatility and real eco­ managers and controlling shareholders. Stronger corporate governance
nomic activities include Fornari and Mele (2013) and Choudhury, helps to reduce stock price volatility. Better corporate governance im­
Papadimitriou, and Shabi (2016). These authors conclude that higher proves monitoring, reduces the agency problem and provides safety to
volatility will have a negative effect on real economic activity, which minority shareholders. As a result, investors feel more confident to
may lead to an economic recession. Similarly, Fornari and Mele (2013) invest in firms with better corporate governance. Therefore, the stock
find that financial volatility explains between 30% and 40% of industrial prices of these firms tend to be less volatile (Huang et al., 2011). Mitton
production growth at the horizons of one and two years. They further (2002), Lemmon and Lins (2003) and Baek, Kang, and Park (2004) also
conclude that, during the same time, stock market volatility alone can provide evidence of better performance of firms with strong corporate
explain between 35% and 55% of future real economic activity. governance during economic uncertainty such as a financial crisis. Using
Given the evidence of possible financial crises following episodes of data from 41 countries, Hu, Li, Taboada, and Zhang (2020) provide
increased financial market volatility (Engle et al., 2013; Baker et al., robust evidence that reforms in corporate board structure improve the
2016; Gulen & Ion, 2016) or the negative effect of volatility on real financial transparency of firms and reduce crash risk. Using country-
economic activity (Fornari & Mele, 2013; Choudhury et al., 2016), it is level governance quality, Johnson, Boone, Breach, and Friedman
essential to identify possible factors that may help us save the global (2000) and La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2002)
economy from entering into any prolonged recession. Several factors conclude that firms in countries with better corporate governance have
have been pointed out in the existing literature in this context, such as higher values and better performance and are less affected by exogenous
economic resilience, intensity of capitalism, corporate governance and shocks. Given the evidence that better country-level corporate gover­
financial development. nance practice helps to reduce market volatility during a period of
Economic resilience is defined as the ability of a particular economy exogenous shocks, this study examines whether corporate governance
to cope with any uncertainty or adverse situation. Briguglio, Cordina, practices among the sample countries help to reduce the detrimental
Farrugia, and Vella (2009) stated that economic resilience refers to the effect of COVID-19 on stock market volatility. The country-level
policy-induced ability of an economy to recover from or adjust to the corporate governance scores are collected from the World Economic
negative impact of adverse exogenous shocks and to benefit from posi­ Forum and the FM Global database. Further details of corporate
tive shocks. Sondermann (2018) pointed out that economic resilience is governance scores are provided in Table 1.
essential to cope with adverse economic shocks and reduce economic The level of financial development could help countries to minimise
costs arising from those shocks. The author mentions that a country with high stock market volatility caused by the virus outbreak. Dellas and

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M. Uddin et al. Journal of Business Research 128 (2021) 31–44

Table 1
List of variables and their definitions.
Variables Definitions of the variables Sources

Variables related to COVID-19

CTC Growth in total COVID-19 cases in the world The World Health Organization, and
CTD Growth in total COVID-19 deaths in the world ourworldindata.org
CSC Growth in total COVID-19 cases of each country in our sample
CSD Growth in COVID-19 deaths of each country in our sample

Variables related to the capital market

RET Log return of the broad stock market index from each country in our sample Datastream
RME Log return on MSCI Emerging Market index
RMW Log return of MSCI world index
RVX Log returns of CBOE VIX volatility index
LVO Log of total trading volume of each market index in our sample
LVX Log of CBOE VIX volatility index
LDX Log of the broad stock market index of each country in our sample
LGX GDP adjusted market Index

Variables related to measures of country-level resilience

RES Overall Resilience score. The score shows the strength and vulnerability in a country’s resilience, both broadly across The FM Global
factors (i.e., economic, risk quality or supply chain), and more precisely across the 12 different drivers. The score offers the
opportunity to the government (managers) seeking to improve their country’s (company’s) resilience to disruptive events.
The drivers included in this score are: (i) within Economic factors - productivity, political risk, oil intensity, and
urbanisation rate; (ii) within Risk Quality factors – exposure to natural hazards, natural hazard risk quality, fire risk
quality, and inherent cyber risk; and (iii) within Supply Chain factors – control of corruption, quality of infrastructure,
corporate governance and supply chain visibility. The overall resilience score is an equally weighted composite measure of
these three factors, where each factor is constructed using an equally weighted mean of four different drivers within each
group. Therefore, in combination with additional information, this score provides business executives, investors, and
government with a source of guidance on enterprise (country-level) risk when making decisions such as risk improvement
priorities, sourcing suppliers, the destination of physical investment, and strength of the country (company) to withstand
surprise events.

COG Corporate governance score. Governance consists of the traditions and institution by which authority in a county is World Economic Forum and the FM Global
exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the
government to effectively formulate and implement sound policies; and the respect of citizens and the state for the
institutions that govern economic and social interactions among them. The score also shows the strength of auditing and
accounting standards, conflicts of interest regulation and shareholder governance within a country.

CPS Capitalism score. Capitalism is an ideology where the means of production is controlled by private business. This means The Heritage Foundation and the World
that individual citizens run the economy without the government interfering in production and pricing. Instead, pricing is Population Review
set by the free market. The score is based on aggregate Economic Freedom Scores from twelve quantitative and qualitative
factors, grouped into four broad pillars (Rule of Law, Government Size, Regulatory Efficiency and Open Markets).

INQ Quality of infrastructure score. The quality and extent of transport infrastructure (road, rail, water and air) and utility The World Economic Forum and the FM
infrastructure. Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy. Global
Effective modes of transport enable entrepreneurs to get their goods and services to market in a secure and timely manner
and facilitate the movement of workers to the most suitable jobs. Similarly, economic efficiency also depends on
uninterrupted electricity supplies and an extensive telecommunications network.

OIN Oil intensity score. The score represents the vulnerability to an oil shock (shortage, disruption, price hike). The score is The FM Global (US Energy Information
estimated by dividing oil consumption by GDP. Thus it measures dependency on oil for production. Administration)

PRO Productivity score. The score represents gross domestic product based on purchasing power parity, divided by the total International Monetary Fund and the FM
population. Global

HEL Health pillar. The pillar measures the extent to which people are healthy and have access to the necessary services to The Legatum Institute
maintain good health, including health outcomes, healthy systems, illness and risk factors, and mortality rates.

FID Financial development index. This is an aggregate measure of the development of financial markets and financial International Monetary Funds
institutions of a country. It measures the relative ranking of countries’ financial markets and institutions in terms of their
depth (size and liquidity), access (the ability of individuals and companies to access financial services), and efficiency (the
ability of institutions to provide financial services at low cost and with sustainable revenues, and the level of activity of the
capital market).

FII Financial institutions development index. This is a sub-component of financial development index, which show the International Monetary Funds
development of financial institutions in terms of their depth, access and efficiency.

Macroeconomic variables
LGD Log of quarterly GDP (in billions of US dollars at current market prices) Datastream
LOP Log of Oil Price (Crude oil WTI in US dollar per barrel) Datastream
MPR Policy rate for monetary policy changes International Monetary Fund

Other variables
EMG Dummy for emerging markets. We use 1 for emerging markets and 0 for developed markets.
MON Monday dummy. We use 1 for Monday and 0 for other days of the week.

Note: This table shows the variables we apply in our empirical models to investigate the connectedness between the stock market and country-level resilience. These
variables are collected from various sources, which include – Thomson Reuters Datastream, World Bank, World Economic Forum, International Monetary Fund,
https://ourworldindata.org/., Legatum Institute, World Health Organization, The Heritage Foundation and The World Population Review.

33
M. Uddin et al. Journal of Business Research 128 (2021) 31–44

Hess (2005) state that financial development should have a negative volatility, and this effect is more prominent in emerging markets.
effect on stock market volatility. The authors point out that asset price Moreover, we have found that changing policy rates amid fear and un­
movement is influenced by market liquidity, trading facilitation, hedg­ certainty does not work very well in developed markets, but provides
ing and diversification of risk and quality corporate control. A developed helpful support to stock markets in emerging countries. The rest of the
financial market with a stronger banking network and a well-structured paper is organised as follows: Section 2 describes the data and meth­
capital market would facilitate these provisions and therefore would odology. In Section 3, we present the empirical findings and Section 4
reduce stock price volatility. One of the important effects of this virus concludes.
outbreak is the shock to both demand and supply. This two-way shock
has made this more worrying for the global economy. However, authors 2. Data and methodology
such as Wang, Wen, and Xu (2018), Bekaert, Harvey, and Lundblad
(2005) and Easterly, Islam, and Stiglitz (2000) find that financial In this paper, we have applied data from various sources. A detailed
development has a significant negative relationship with macroeco­ list of the variables, their definitions and sources is provided in Table 1.
nomic volatility. These authors find that financial development helps to Our dataset, including daily price indices, daily trading volumes and the
reduce the volatility of both aggregate consumption and aggregate daily CBOE VIX index cover the period 1 July 2019 to 14 August 2020.
output and thereby helps the economy to absorb both the demand and We have collected these capital market, resilience and macroeconomic
supply shocks. Given the evidence that financial development help to data for 34 economies based on the data availability and comprehen­
mitigate stock market volatility, this study will examine whether the siveness of the market. A description of our sample by country is pre­
level of financial development of the sample countries helps to reduce sented in Table 2. There are an equal number of observations for each
the effect of the global pandemic on stock market volatility. Data on the country and thus we have a balanced panel.
financial development index is available from the IMF database and is The daily data on the number of COVID-19 reported cases and deaths
constructed using information on the size and liquidity of financial start from the first official record of the World Health Organization,
markets and by using access of financial services and efficiency of which is 31 December 2019, and continue until 14 August 2020. Before
financial institutions. Further details on the financial development index using our variables in empirical models, we have made sure that they are
are provided in Table 1. not suffering from the unit root problem. To control the stationarity
Given the above literature, we contribute to the existing literature in problem, we use the first or second difference of the data where
the following ways: first, we examine the effect of COVID-19 on stock appropriate, based on various panel unit root tests, such as Levin, Lin,
market volatility using data from 34 countries. Second, consistent with and Chu (2002), Im, Pesaran, and Shin (2003) and Fisher-types.
previous literature, we analyse the impact of economic resilience, level For empirical analysis, we develop a dynamic panel-based EGARCH
of capitalism, corporate governance and financial development on stock (1,1) model following the approach suggested in earlier literature, such
market volatility. Third, we depart from the existing literature and also as Lee (2010) and Ribeiro, Cermeno, and Curto (2017). For a cross-
look at the effect of macroeconomic policy on stock market volatility. section of N countries and T time periods, we express the conditional
We suggest that monetary policy adjustments such as a reduction in mean equation for index returns (RETit ) as a dynamic panel with fixed
bank rate could be helpful for coming out of the economic constraints effects:
caused by the exogenous shock. However, changing policy rates during
∑
K
uncertain times may be considered as a sign of a gloomy future with RET it = μi + Ak RET i,t− k + Xit B1 + CW t B2 + CSit B3 + εit , i = 1, ⋯, N; t
more uncertainty, and could therefore trigger more volatility in the k=1
stock market.4 Fourth, we also have examined the effectiveness of health = t, ⋯T
system development in helping to reduce market volatility. The COVID- (1)
19 pandemic has created a fear of infection and death among people. A
sound, effective and robust health system should give people assurance where μi captures the country-specific effects that are assumed to be
and confidence. Anecdotal evidence suggests that, while most sectors fixed, Xit is a vector of control (exogenous) variables, which includes log
have faced negative return shocks in recent times, the healthcare sector of trading volume (LVO), the VIX returns (RVX), the log of oil price
has seen the opposite. Baker, Bloom, Davis, and Kost (2019) state that an (LOP) and the log of quarterly GDP (LGD). B1 is the corresponding co­
effective health policy is in the list of issues that contribute to stock efficient of this vector. In Eq. (1), CWt and CSit represent the vector of
market volatility. Finally, instead of examining return and volatility change in COVID-19-related cases and deaths worldwide (CTC and CTD)
changes and the contagion effect of pandemics, as recent papers have and in each country in our sample (CSC and CSD), respectively, where
done,5 we examine the relevant economic factors that may help to the corresponding coefficient are B2 and B3 . We have used both country-
minimise volatility. Examining these factors is important as there is a specific and global COVID-19-related data in this study because during a
possibility of another wave of virus outbreak, which might lead us to crisis financial markets observe a contagion effect and thus become not
persistent higher stock market volatility in the coming months. As only prone to local information but also to global risk (see Akhtar­
higher volatility could lead us to a financial crisis, policymakers should uzzaman, Boubaker, & Sensoy, 2020). For example, the European and
focus on these factors to avoid any future fallout. Asian markets have displayed higher volatility with the increasing
Our results show that the COVID-19 pandemic has significantly numbers of COVID-19 cases and deaths in the US (see, Ali, Alam, &
increased stock market volatility across the world. However, economic Rizvi, 2020). Similarly, news on the development of a coronavirus
resilience, intensity of capitalism, quality of corporate governance and vaccine heated up financial markets across the world. Moreover, during
level of financial development provide helpful support to reduce the this COVID-19 pandemic, commodity markets such as the oil price
excessive heat in global capital markets. Our results confirm the dif­ experienced an unforeseen fall, which had a spillover effect on equity
ferential policy response by developed and emerging countries. For markets across the world. Therefore, we use the global impact of COVID-
example, we have found robust evidence that an improved health system 19 on the local equity returns by including CTC and CTD in Eq. (1) with
does help investors feel assured and thereby helps to reduce market the local cases and deaths.
The N-dimensional vector of disturbances εit in Eq. (1) is assumed to
have a normal distribution with mean zero along with the following
4
See Bloom, Bond, and Reenen (2007). conditional moments:
5
Ashraf (2020), Sharif, Aloui, and Yarovaya (2020), Al-Awadhi, Alsaifi, Al- [ ]
E εit εjs = 0 for i ∕= j and t ∕
= s, (2)
Awadhi, and Alhammadi (2020), Zaremba, Kizys, Aharon, and Demir (2020)
Corbet, Hou, Hu, Lucey, and Oxley (2020) and Akhtaruzzaman et al. (2020).

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M. Uddin et al. Journal of Business Research 128 (2021) 31–44

Table 2
Description of the data.
List of the Market Frequency of Per Cumulative
observations cent Percentage

Australia 295 2.94 2.94

Austria 295 2.94 5.88
Belgium 295 2.94 8.82
Brazil 295 2.94 11.76
Canada 295 2.94 14.71
China 295 2.94 17.65
Czech 295 2.94 20.59
Egypt 295 2.94 23.53
Finland 295 2.94 26.47
France 295 2.94 29.41
Germany 295 2.94 32.35
Greece 295 2.94 35.29
Hungary 295 2.94 38.24
India 295 2.94 41.18
Indonesia 295 2.94 44.12
Italy 295 2.94 47.06
Japan 295 2.94 50.00 Graph 1. Distribution of log returns (RET).
Malaysia 295 2.94 52.94
Mexico 295 2.94 55.88 the market resilience could lessen the variance in the stock market then
Netherland 295 2.94 58.82
we should expect a negative sign of λ3 for RSit components. We also
Norway 295 2.94 61.76
Philippine 295 2.94 64.71 introduce an interaction term of RSit and CWt ; and of RSit and CSit . Our
Poland 295 2.94 67.65 equation with the interaction terms is:
Singapore 295 2.94 70.59 ( )
South Africa 295 2.94 73.53 ln σ 2it = λ0 + λ1 CW t + λ2 CSit + λ3 RSit + λ4 CWt *RSit + λ5 CSit *RSit + αzi,t− 1
South Korea 295 2.94 76.47
(⃒ ⃒ √̅̅̅̅̅̅̅̅ )
Spain 295 2.94 79.41 + γ ⃒zi,t− 1 ⃒ − 2/π + δln(σ 2i,t− 1 )
Sweden 295 2.94 82.35 (7)
Switzerland 295 2.94 85.29
Taiwan 295 2.94 88.24 We run various post-estimation tests to confirm the statistical val­
Thailand 295 2.94 91.18 idity of our models. Moreover, we have applied between-effect models,
Turkey 295 2.94 94.12
UK 295 2.94 97.06
and our results remain statistically robust.
USA 295 2.94 100
Total 10,030 100 3. Empirical findings
Note: This table shows the list of countries we consider in the study.
3.1. Preliminary statistics and basic volatility model
[ ]
E εit εjs = 0 i = j and t ∕
= s, (3) Graph 1 shows the distribution of the log return of indices under
[ ] consideration over the sample period. A significant variance is observed
E εit εjs = σ 2ij,t for i ∕
= j and t = s, (4) from March 2020, when COVID-19 hits the European countries, e.g.
Italy, France and Spain. That suggests COVID-19 has increased varia­
[ ]
E εit εjs = σ 2it for i = j and t = s, (5) tions in returns among the equity markets in our study. The impact is
further documented in Table 3, where we report the summary statistics
The conditions in Eqs. (2) and (3) assume no non-contemporaneous and correlation matrix between our main variables of interest. Panel A of
cross-sectional correlation and no autocorrelation. The third and fourth Table 3 indicates that the mean index return of our sample markets is
assumptions define the general conditions of the conditional variance- − 0.03%, and the mean returns of MSCI World Index and Emerging
covariance process. Empirically, the cross-sectional co-movements of Market Index are around nearly zero (0.03% and 0.01%, respectively)
conditional variance can be captured via other models, such as Boller­ over the sample period. A possible effect of COVID-19 is further reflected
slev (1990) CCC and Engle (2002) DCC. However, in this paper, we in the trading volume. The mean of log of trading volume (LVO) is 12.50
opted to examine whether market resilience could reduce the extra stock with a high standard deviation of 2.87, implying a significant fluctuation
market volatility induced by COVID-19, so we are only interested in the in the trading volume following the increased volatility in the equity
conditional variance process developed and estimated from Eq. (1). markets induced by the coronavirus. In support of the argument for high
Therefore, ensuring our objective, we assume the conditional variance variance in market returns and fluctuations in trading volume, we
follows a Nelson (1991) EGARCH (1,1) process: observe the volatility index, VIX, reached the highest level around the
(⃒ ⃒ √̅̅̅̅̅̅̅̅ )
( ) time when COVID-19 hit the European markets, and the World Health
ln σ 2it =λ0 +λ1 CW t +λ2 CSit +λ3 RSit + αzi,t− 1 +γ ⃒zi,t− 1 ⃒ − 2/π +δln(σ2i,t− 1 )
Organization declared the situation to be a pandemic (see Graph 2). The
(6) VIX remains high until the end of our sample period, starting from
March 2020, compared to before the pandemic.6
where zit = εit /σit , and the error term follows a Gaussian process. Like The correlation matrix further confirms the negative association
the earlier Eq. (1), CWt and CSit represent the vector of growth in global between COVID-19 and equity market returns. In Panel B of Table 3,
and country-specific COVID-19 cases and deaths (CTC, CTD, CSC and RET, RMW and RME are negatively correlated to the change in the
CSD) in Eq. (6). The RSit , on the other hand, is a vector of our resilience number of coronavirus cases (CTC and CSC) and deaths (CTD and CSD).
score, its sub-components’ scores, and other macro characteristics as The association of COVID-19 is more negative with the emerging market
described in Table 1. Therefore, our prime objective is to determine the
sign and value of the coefficients of the vectors CWt , CSit and RSit , i.e.
sign and value of λ1 , λ2 and λ3 in Eq. (6). For example, a positive sign of 6
The World Health Organization (WHO) declared the COVID-19 to be a
λ1 and λ2 would imply a volatility enhancement due to COVID-19, yet if pandemic on 11 March 2020.

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M. Uddin et al. Journal of Business Research 128 (2021) 31–44

Table 3
Summary statistics and correlation matrix.
Panel A: Summary statistics

stats Mean Standard Deviation Percentile Mean

p25 p50 p75 p95

LDX 8.5515 1.3457 7.3834 8.5869 9.2972 10.9485

LGX 1.6114 0.4515 1.3629 1.5457 1.7760 2.8221
RET − 0.0003 0.0171 − 0.0056 0.0001 0.0068 0.0213
LVO 12.5034 2.8683 10.9516 12.1884 13.7328 18.9514
LVX 3.0428 0.4834 2.6203 2.8887 3.3820 3.9975
RVX 0.0015 0.0906 − 0.0541 − 0.0071 0.0363 0.1651
RMW 0.0003 0.0168 − 0.0037 0.0009 0.0061 0.0232
RME 0.0001 0.0139 − 0.0049 0.0006 0.0062 0.0184
MPR 2.2344 3.3537 0.0000 0.9000 3.7500 9.2500
LOP 3.7817 0.3724 3.6595 3.9691 4.0367 4.1097
LGD 5.5954 1.4127 4.5333 5.1880 6.3749 8.4725
RES 4.2159 0.3383 3.8895 4.3838 4.5017 4.5750
CPS 4.2256 0.1370 4.1558 4.2503 4.3202 4.4055
COG 4.2810 0.1904 4.1748 4.3192 4.4142 4.5801
OIN 4.2801 0.1511 4.1860 4.3122 4.3959 4.4443
INQ 4.3326 0.1893 4.1904 4.3668 4.5019 4.5689
PRO 3.2303 0.6428 2.7262 3.4398 3.6937 4.0508
HEL 4.3570 0.0848 4.3232 4.3830 4.4076 4.4597
FID 0.6490 0.1771 0.5160 0.6727 0.7912 0.8768
FII 0.6838 0.1731 0.5651 0.7013 0.8390 0.9400

Panel B: Correlation Matrix

CTC CSC CTD CSD RET LVO LVX RMW RME RES MPR LOP LGD

CTC 1.0000
CSC 0.3802 1.0000
CTD 0.0898 0.1471 1.0000
CSD 0.0506 0.1363 0.8182 1.0000
RET − 0.0418 − 0.0750 − 0.1182 − 0.0669 1.0000
LVO − 0.0114 0.0056 0.0212 0.0284 − 0.0065 1.0000
LVX − 0.0046 0.1012 0.1529 0.2014 − 0.1144 0.0762 1.0000
RMW − 0.0211 − 0.0545 − 0.0873 − 0.0479 0.6424 − 0.0098 − 0.1197 1.0000
RME − 0.0834 − 0.1293 − 0.1222 − 0.0866 0.6545 − 0.0062 − 0.1236 0.6999 1.0000
RES − 0.0001 0.0004 0.0052 0.0031 0.0039 − 0.4801 0.0050 − 0.0030 − 0.0025 1.0000
MPR − 0.0020 − 0.0055 − 0.0064 − 0.0072 − 0.0057 0.3190 − 0.0865 − 0.0057 − 0.0107 − 0.6763 1.0000
LOP 0.0058 − 0.1085 − 0.0861 − 0.1702 − 0.0089 − 0.0601 − 0.8343 − 0.0258 − 0.0056 − 0.0009 0.0861 1.0000
LGD − 0.0023 − 0.0090 0.0078 0.0133 0.0105 0.4870 − 0.0362 − 0.0018 − 0.0016 0.0977 − 0.0204 0.0390 1.0000

Panel C: Developed versus Emerging Markets

Variables Developed Markets Emerging Markets Comparison Tests Rank-Sum Tests

Mean SD Mean SD Mean Variance

RES 4.4927 0.0772 3.9391 0.2640 − 142.51*** 6609.35*** 83.16***

CPS 4.3032 0.0910 4.1481 0.1313 − 68.77*** 655.77*** 55.25***
COG 4.3653 0.1354 4.1967 0.1999 − 49.77*** 684.64*** 42.33***
MPR 0.3263 0.7379 4.1424 3.8302 69.28*** 3529.95*** − 72.05***
LGD 5.9798 1.5022 5.2110 1.1910 − 28.32*** 166.35*** 26.85***
OIN 4.2625 0.1642 4.2967 0.1355 11.21*** 219.94*** − 16.51***
INQ 4.4611 0.0985 4.2040 0.1701 − 95.98*** 533.36*** 68.75***
PRO 3.7074 0.2261 2.7531 0.5657 − 110.93*** 4695.07*** 78.36***
HEL 4.4061 0.0314 4.3079 0.0926 − 71.14*** 3955.90*** 69.66***
FID 0.7696 0.1011 0.5210 0.1482 − 97.16*** 717.98*** 69.11***
FII 0.7982 0.1112 0.5623 0.1414 − 91.75*** 193.18*** 67.85***

Note: In this table, we show the statistical difference in the macroeconomic characteristics between developed and emerging markets within our sample countries. We
use the International Monetary Fund’s definitions to separate emerging markets from developed markets. We use a pairwise T-test, Levene (1960) robust F-test and the
Wilcoxon rank-sun (Mann-Whitney) test to compare the mean, variance and median differences between the developed and emerging market groups.
***, ** and * indicates statistical significance at the 1%, 5% and 10% levels, respectively.

index RME (up to − 0.1293 with CSC) than the aggregate sample (up to Moreover, the sign of monetary policy response (MPR) and COVID-19 is
− 0.1182 with CTD) and the world index (up to − 0.0873 with CTD). negative (up to − 0.0072 with CSD), suggest a reduction in the policy
Similarly, the correlation of volatility index (LVX) is strongly positive rate by central banks across the world after the outbreak of coronavirus.
with CSC (0.1012), CTD (0.1529) and CSD (0.2014), which shows an Finally, the resilience index (RES) is positively correlated with COVID-
increase in market variance following the COVID-19 outbreak. As ex­ 19 (except with CTC) and market returns (0.0039) but negatively with
pected, on the other hand, we observe a significant negative correlation trading volume (− 0.4801). The associations, therefore, specify that
of COVID-19 with the oil price (up to − 0.1702 with CSD), which sup­ resilient economies might display desirable returns for investors despite
ports the adverse impact of a recent reduction in oil prices in the in­ their higher COVID-19-related cases and deaths. However, investors in
ternational market. Surprisingly, the LGD is negatively associated these resilient economies may become highly sceptical around this
(-0.0023 with CTC and − 0.0090 with CSC), indicating that larger COVID-19 shock, and significantly reduce their trading.
economies are critically affected by the growth in COVID-19 cases. Panel C of Table 3 reports the statistics related to country-level

36
M. Uddin et al. Journal of Business Research 128 (2021) 31–44

Table 4
Basic volatility model.
(1) (2) (3)
Variables RET Conditional Conditional
Variance Process Variance Process

RETt-1 0.0003
(0.0251)
RVX − 0.0643***
(0.0065)
LVO 0.0003
(0.0005)
LOP 0.0469***
(0.0046)
LGD 0.0001
(0.0003)
CTC − 0.0017*** 4.3095*** 2.2169
(0.0003) (0.5176) (6.1079)
CTD − 0.0079*** 2.7830*** − 5.9128
(0.0008) (0.3749) (4.7610)
CSC 0.0003 0.0561* 1.1170**
Graph 2. Distribution of log of CBOE VIX index. (0.0019) (0.0314) (0.5408)
CSD − 0.0051* 0.2407*** 1.5135**
macroeconomic characteristics of developed and emerging markets (0.0029) (0.0395) (0.6985)
RES − 0.2890***
within our sample countries reported in Table 2 (Appendix A shows the
–
(0.0469)
country-level mean). The mean value of developed markets in Panel C of RES*CTC – 0.4601
Table 3 is higher than that of emerging markets across all categories, (1.4461)
except the monetary policy rate (MPR) and oil intensity score (OIN). The RES*CTD – 2.2313**
(1.1241)
MPR is significantly low (0.3263) in developed markets, probably due to
RES*CSC – − 0.2414*
quantitative easing in monetary policy in various markets, such as in the (0.1237)
US, UK and EU. The oil intensity score (OIN), on the other hand, is RES*CSD – − 0.2904*
slightly higher in emerging markets such as China, India, Turkey, (0.1593)
Indonesia and the Philippines (4.2967), which may be due to their α 0.0077 0.0008
strong dependency on oil-intensive manufacturing sectors (see Appen­ (0.0145) (0.0139)
0.4928*** 0.4702***
dix A for their score).
γ
(0.0208) (0.0213)
In the last three columns of Panel C in Table 3, we report the results
δ 0.3987*** 0.3325***
of the statistical tests to compare the mean, variance and median values
(0.0397) (0.0385)
between developed and emerging markets. The pairwise T-test confirms λ0 − 5.3731*** − 4.7474***
that the mean scores of each macroeconomic variable reported in Panel (0.3449) (0.3695)
C for emerging markets are statistically and significantly different from p-value for equality of 0.016 0.000
those for developed markets. Similarly, Levene (1960) robust F-test and CTC and CTD
the Mann-Whitney test suggest that the variance and median, respec­ p-value for equality of 0.015 0.000
CTC and CTD
tively, are also statistically different between developed and emerging Observation 9,848 5,989 5,989
markets in our sample. All the statistics are significant at the 1% level. R2
0.1844
No. of countries 34
Time FE Yes No No
3.2. The basic conditional mean and variance model Country FE Yes No No

Note: This table shows the results of our conditional mean Eq. (1) using a dy­
Table 4 presents the results of conditional mean and conditional namic panel model with fixed effects in column one. We capture the conditional
variance for index returns (RETit ) using Eqs. (1) and (6), respectively. variance process from Eq. (1) using EGARCH (1,1) in column two. Therefore,
Column (1) of this table exhibits the findings related to the dynamic columns (1) and (2) are referred to as our basic return and volatility model,
panel with fixed effects applying Eq. (1), which shows that COVID-19 is respectively. Our remaining analysis is based on the conditional variance pro­
negatively affecting the market returns of our sample economies. The cess reported in column (2) of this table. Column (3) reports the results related to
growth in the total number of COVID-19 cases (CTC) and deaths (CTD) the impact of country-level resilience (RES) and its interaction with COVID-19
cases and deaths on volatility (Eq. (7)).
worldwide has reduced the overall index returns by − 0.17% and
***, ** and * indicates statistical significance at the 1%, 5% and 10% levels,
− 0.79%, respectively, and these are statistically significant at the 1 per
respectively.
cent level. The country-specific growth in COVID-19 deaths (CSD) is also
significant at the 10 per cent level and reduced the returns by − 0.51%.
variance process EGARCH (1, 1), applying Eq. (6) to capture the vola­
In addition to COVID-19, we have used VIX returns (RVX) and trading
tility in global equity markets. It is also our primary interest in this paper
volume (LVO) to control for market sentiment and trading behaviour.
as our subsequent volatility models are developed based on that process.
RVX is negatively influencing the returns (− 6.43%) in Table 4 and this
The coefficients of growth in total global and country-specific cases and
also is statistically significant. The oil price (LOP) and quarterly GDP
deaths suggest that the conditional variance of an equity market is
(LGD), however, are used to control the spillover effect and the size
positively associated with COVID-19, and the association is statistically
difference between the economies in our sample. They are positively
significant at the 10 per cent level. However, growth in global cases
affecting the returns by 4.69% and 0.01%, respectively, but only the
(4.31) and deaths (2.78) has a stronger impact on market variance than
coefficient of LOP is significant at the 1 per cent level. All these re­
growth in local cases (0.06) and deaths (0.24) in our dataset. The up­
lationships are consistent with Table 3 and previous literature (e.g.
surge in market volatility following the COVID-19 pandemic is also
Mollick & Assefa, 2013; Fernandes, Medeiros, & Scharth, 2014; Onali,
documented in Onali (2020), Baker, Bloom et al. (2020), Baker, Bloom,
2020) except the effect of LOP.
et al. (2020) and Yilmazkuday (2020). In addition, the coefficient of δ in
In column (2) of Table 4 we report the results of the conditional

37
M. Uddin et al. Journal of Business Research 128 (2021) 31–44

column (2) shows the persistence of volatility. The positive α coefficient improve market resilience and minimise equity variance by 18.60 and
implies that positive innovations are more destabilising than negative 17.04 per cent, respectively. The productivity score (PRO) and infra­
innovations during our sample episode. However, the symmetric effect structure quality score (INQ), however, could reduce the volatility by
(0.49) appears stronger than the positive innovation (0.008). Finally, 12.47% and 0.045%, respectively. Finally, the size of an economy (LGD)
the p-values for equality of growth in global and local cases and deaths might also negatively influence the return variance by 0.85%, but it is
confirm that their respective coefficients are statistically different in not found to be statistically significant even at the 10 per cent level of
both the conditional mean (i.e. return) and conditional variance models. significance.
We have reported the interaction of country-level resilience (RES) In addition to the negative effects of the above-discussed variables on
and COVID-19 in column (3) of Table 4. The interaction terms reflect the the conditional variance process, we find that oil intensity score (OIN)
role of the resilience score in minimising the risk associated with COVID- and monetary policy (MPR) are positively associated with returns
19 cases and deaths on the equity market conditional variance. The volatility. As reported in Table 1, the OIN represents the vulnerability of
resilience score (RES) and its interactions with country-specific cases a country to an oil shock (shortage, disruption, price hike); thus, it
(RES*CSC) and deaths (RES*CSD) are negative and statistically signifi­ measures the country’s dependence on oil for its productivity. There­
cant at the 10 per cent level. Our findings suggest that the resilience of a fore, the definition of oil intensity implies that the country’s dependence
country could reduce the surge of equity market variance by 24.14% and on oil will increase the equity market variance by 14.26% during an
29.04%, respectively, via minimising the risk associated with local unexpected event such as COVID-19. This positive influence might be
COVID-19 cases and deaths. Moreover, the resilience itself could reduce due to the uncertainty of oil production and oil supply during the global
the volatility by 28.90 per cent. pandemic and lockdown (see Estrada, 2020). The monetary policy rate
(MPR), on the other hand, specifies the impact of central banks’
3.3. Market resilience and COVID-19 response to COVID-19. We have seen that central banks across the world
have reduced their policy rate to increase the money supply and boost
In Table 5, we present the impact of various resilience-related indices consumer confidence during the COVID-19 pandemic7. The coefficient
and scores (as listed in Table 1) on the conditional variance structure of MPR in column (4) of Table 5 is 0.0104 and is statistically significant
following Eq. (6). Findings are reported in columns (1) to (12) of at the 1 per cent level. It suggests that increasing (lowering) the policy
Table 5. Changes in total COVID-19 cases (CTC and CSC) and total rate will increase (lower) the market variance.
deaths (CTD and CSD) are positively and significantly related to market The simultaneous impact of resilience’s sub-components and other
variance across the table. However, as found in Table 4 (column 2), the country-level macro characteristics is presented in column (12). We
impact of global cases (up to 4.48) and deaths (up to 3.84) is stronger on have excluded RES and FII in this model as their sub-components and
the equity market variance across Table 5 than that of the local cases (up aggregate index, respectively, are included. Results indicate the power
to 0.08) and deaths (up to 0.26). of capitalism and governance while a country faces a crisis such as a
The impact of overall resilience index (RES) within the conditional pandemic. An economy with a higher score in capitalism (CPS) and
variance process is displayed in column (1). The coefficient is negative governance (COG) could reduce the equity market variance by 88.68
(-0.207) and statistically significant at the 1 per cent level, which implies and 29.55 per cent, respectively, which are statistically significant at the
that market resilience could reduce the returns volatility by 2.07% over 1 per cent level. However, unexpectedly, the aggregate financial
the sample period. That means a market might focus on the enhance­ development index (FDI) is found to be positive (0.5320) and significant
ment of its aggregate resilience to avoid an equity market crisis in column (12). The coefficients of health pillar, infrastructure quality
following any unexpected shock such as the pandemic. In columns (2) to and size of the economy are still negative but not statistically significant,
(11), we show the impact of various macro characteristics of a country like all the other variables.
with the assumption that these might contribute to the enhancement of
economic resilience and might help to reduce the returns variance of 3.4. Robustness tests
their capital market. As expected, we find that the capitalism score
(CPS), governance score (COG), size of the economy (LGD), productivity We test the robustness of association using interaction terms and
score (PRO), infrastructure quality (INF), health pillar (HEL), financial separating the samples between developed and emerging markets. In
development index (FDI) and financial institutions development index Table 6, we exhibit the findings related to the interaction terms, and
(FII) are negatively affecting the conditional variance in our stepwise Table 7 exhibits the comparative analysis of developed and emerging
models. The coefficients are all statistically significant at the 1 or 5 per markets. For interactions, we interact aggregate resilience scores (RES)
cent level. For example, the corresponding coefficient of CPS is − 0.8825, with its sub-components and with other country-level macro attributes.
and it is significant at the 1 per cent level, meaning that the aggregate The objectives of these interaction terms are to see, first, the joint effect;
economic freedom of a country could improve the resilience of a market and, second, which country-level macro characteristic may relatively
and reduce the returns volatility by around 88.25% during a shock. reduce the conditional variance during an uncertain situation such as
Interestingly, the health pillar (HEL) has become a significant the COVID-19 pandemic. As reported in Table 6, we have found the
determinant to market volatility during this COVID-19 pandemic. The expected signs and statistical significance for several interaction terms.
pillar measures the extent to which people are healthy and have access Like our earlier results in Table 4, the interaction term between resil­
to the necessary services to maintain good health. It has a significant ience score (RES) and capitalism score (CPS), governance score (COG),
impact on investors’ sentiment and could reduce the return volatility by economic size (LGD), productivity score (PRO), infrastructure quality
67.39% per cent over the sample period. Next to the health pillar, the (INQ), health pillar (HEL), financial development index (FDI) and
governance quality (COG) has a coefficient of − 0.4614 in column (3), development of financial institutions index (FII) are negative. It suggests
showing the importance of a country’s governance quality on investors’ that these variables could reduce the equity market variance within the
behaviour during a crisis period. This finding suggests that an economy given resilience of a country. However, the coefficients of CPS
could reduce its equity market volatility by 46.14% with the capacity of (− 0.9090), COG (− 0.0107) and INQ (-0.7688) are only statistically
the government to effectively formulate and implement sound policies, significant at the 10 per cent level. In columns (3) and (6), the joint
with better auditing and accounting standards, with better regulation of
conflicts of interest, and stronger shareholder protection than other
countries. 7
see the International Monetary Fund for detail monetary policy responses to
The development of financial institutions (FII) and the aggregate COVID-19: https://www.imf.org/en/Topics/imf-and-COVID-19/Policy-Respon
development of financial markets and institutions (FDI) could also ses-to-COVID-19.

38
 M. Uddin et al.
Table 5
Impact of Resilience Score.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Var. Conditional Variance Process

CTC 4.3020*** 4.0567*** 4.1910*** 4.3933*** 4.3159*** 4.3071*** 4.4816*** 4.2993*** 4.2842*** 4.1902*** 4.2002*** 3.9934***
(0.5228) (0.5319) (0.5231) (0.5176) (0.5175) (0.5226) (0.5212) (0.5232) (0.5196) (0.5259) (0.5261) (0.5478)
CTD 2.7650*** 3.8377*** 3.2195*** 2.5552*** 2.6472*** 2.7916*** 2.0794*** 2.9027*** 2.7392*** 2.4677*** 2.4600*** 3.4363***
(0.3753) (0.3772) (0.3754) (0.3744) (0.3749) (0.3754) (0.3794) (0.3755) (0.3751) (0.3801) (0.3800) (0.3896)
CSC 0.0565* 0.0745** 0.0790** 0.0548* 0.0517 0.0479 0.0530 0.0455 0.0412 0.0503 0.0503 0.0608
(0.0308) (0.0331) (0.0312) (0.0311) (0.0317) (0.0312) (0.0327) (0.0317) (0.0317) (0.0316) (0.0314) (0.0376)
CSD 0.2395*** 0.1995*** 0.2002*** 0.2445*** 0.2479*** 0.2496*** 0.2462*** 0.2567*** 0.2614*** 0.2510*** 0.2508*** 0.2152***
(0.0388) (0.0417) (0.0393) (0.0392) (0.0400) (0.0393) (0.0405) (0.0400) (0.0400) (0.0399) (0.0396) (0.0466)
RES − 0.2068***
(0.0233)
CPS − 0.8825*** − 0.8868***
(0.0783) (0.1128)
COG − 0.4614*** − 0.2955***
(0.0471) (0.0686)
MPR 0.0104*** − 0.0029
(0.0025) (0.0040)
LGD − 0.0085 − 0.0170
(0.0066) (0.0104)
PRO − 0.1247*** 0.0238
(0.0132) (0.0438)
39

OIN 0.1426** 0.0871

(0.0566) (0.0696)
INQ − 0.0045*** − 0.0012
(0.0005) (0.0017)
HEL − 0.6739*** − 0.2958
(0.0979) (0.2202)
FDI − 0.1704*** 0.5320***
(0.0459) (0.0979)
FII − 0.1860***
(0.0452)
α − 0.0016 − 0.0115 − 0.0135 − 0.0001 0.0003 − 0.0034 0.0108 − 0.0020 − 0.0015 0.0094 0.0090 0.0033
(0.0137) (0.0144) (0.0149) (0.0135) (0.0135) (0.0137) (0.0142) (0.0136) (0.0136) (0.0137) (0.0138) (0.0166)
γ 0.4820*** 0.4527*** 0.4654*** 0.4896*** 0.4912*** 0.4778*** 0.5101*** 0.4770*** 0.4845*** 0.4966*** 0.4951*** 0.4750***
(0.0210) (0.0219) (0.0219) (0.0208) (0.0207) (0.0211) (0.0211) (0.0211) (0.0209) (0.0210) (0.0211) (0.0240)
δ 0.4031*** 0.3169*** 0.3671*** 0.4232*** 0.4075*** 0.3963*** 0.4570*** 0.3832*** 0.4019*** 0.4382*** 0.4397*** 0.3449***

Journal of Business Research 128 (2021) 31–44

(0.0408) (0.0387) (0.0389) (0.0418) (0.0402) (0.0411) (0.0426) (0.0402) (0.0410) (0.0425) (0.0427) (0.0404)
λ0 − 4.4659*** − 2.3794*** − 3.6847*** − 5.1830*** − 5.2460*** − 4.9949*** − 5.4617*** − 5.1604*** − 2.4101*** − 4.9047*** − 4.8761*** − 0.1527
(0.3462) (0.4036) (0.3434) (0.3621) (0.3472) (0.3496) (0.4403) (0.3434) (0.5156) (0.3681) (0.3701) (1.0911)
Obs. 5,989 5,989 5,989 5,989 5,989 5,989 5,812 5,989 5,989 5,812 5,812 5,635

Note: This table exhibits the impact of COVID-19, country-level resilience, resilience’s sub-components and other macro characteristics on the volatility of equity markets within our sample countries. We estimated each of
these conditional variance processes using Eq. (6). From column (1) to (11) we follow the stepwise models and in column (12) we present the simultaneous association. However, the resilience score is excluded in column
(12) as its sub-components are considered, such as governance (COG), productivity (PRO), oil intensity (OIN) and infrastructure quality (INF). Similarly, we excluded Financial institutions development index (FII) in the
simultaneous model as we have included the aggregate development index FDI. The robust standard errors are reported in parentheses.
***, ** and * indicates statistical significance at the 1%, 5% and 10% levels, respectively.
M. Uddin et al. Journal of Business Research 128 (2021) 31–44

effects of RES*MPR and RES*OIN are also significant at the 5 per cent In addition to the signs and significance, the magnitudes of joint
level, but the signs are positive. That implies a country with higher effects suggest that the level of capitalism (CPS), infrastructure quality
policy rate and higher intensity of oil consumption would experience (INQ) and oil intensity score (OIN) are the three most critical macro
relatively larger equity variance during COVID-19 compared to other characteristics which contribute to the country-level resilience and help
markets with a similar resilience score. to reduce the return variance over the sample period. For example,

Table 6
Interaction of Sub-component with Resilience Index.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Var. Conditional Variance Process

CTC 3.7192*** 3.7973*** 3.7676*** 3.8831*** 3.8515*** 4.0456*** 3.8477*** 3.8941*** 3.8691*** 3.8431***
(0.5356) (0.5326) (0.5337) (0.5304) (0.5313) (0.5359) (0.5305) (0.5298) (0.5377) (0.5378)
CTD 3.8359*** 3.5326*** 3.3763*** 3.1636*** 3.3033*** 2.6754*** 3.1766*** 3.1207*** 2.9978*** 3.0019***
(0.3792) (0.3782) (0.3789) (0.3777) (0.3784) (0.3830) (0.3784) (0.3777) (0.3833) (0.3834)
CSC 0.1568*** 0.1414*** 0.1338*** 0.1263*** 0.1178*** 0.1240*** 0.1227*** 0.1198*** 0.1163*** 0.1172***
(0.0331) (0.0313) (0.0312) (0.0308) (0.0314) (0.0368) (0.0309) (0.0310) (0.0313) (0.0309)
CSD 0.0854** 0.1121*** 0.1265*** 0.1382*** 0.1473*** 0.1416*** 0.1384*** 0.1469*** 0.1526*** 0.1525***
(0.0417) (0.0395) (0.0390) (0.0386) (0.0393) (0.0446) (0.0387) (0.0388) (0.0394) (0.0387)
RES 3.9869*** − 0.0024 − 0.1296*** − 0.0357 0.2973** − 1.8248** − 3.2894*** − 0.8538 0.0704* − 0.0478
(1.0395) (0.5825) (0.0363) (0.0311) (0.1894) (0.9078) (0.7705) (2.1232) (0.1090) (0.1138)
CPS 2.9999***
(1.0332)
RES*CPS − 0.9090***
(0.2471)
COG − 0.2958**
(0.5627)
RES*COG − 0.0107*
(0.1365)
MPR 0.0293
(0.0255)
RES*MPR 0.0116*
(0.0066)
LGD 0.0036
(0.0098)
RES*LGD − 0.0005
(0.0014)
PRO 0.0598
(0.2352)
RES*PRO − 0.0438
(0.0575)
OIN − 1.8074**
(0.9017)
RES*OIN 0.4177**
(0.2103)
INQ − 3.2103***
(0.7469)
RES*INQ − 0.7688***
(0.1796)
HEL − 1.0224
(1.9835)
RES*HEL − 0.1968
(0.4873)
FDI 1.4210*
(0.7647)
RES*FDI − 0.2926
(0.1804)
FII 0.9174
(0.7389)
RES*FII − 0.1481
(0.1755)
α − 0.0176 − 0.0154 − 0.0077 − 0.0092 − 0.0119 0.0025 − 0.0125 − 0.0103 0.0042 0.0050
(0.0149) (0.0152) (0.0142) (0.0145) (0.0141) (0.0146) (0.0140) (0.0141) (0.0147) (0.0145)
γ 0.4517*** 0.4597*** 0.4678*** 0.4724*** 0.4685*** 0.4917*** 0.4717*** 0.4733*** 0.4810*** 0.4828***
(0.0223) (0.0225) (0.0213) (0.0215) (0.0214) (0.0218) (0.0211) (0.0211) (0.0216) (0.0216)
δ 0.3320*** 0.3610*** 0.3619*** 0.3879*** 0.3725*** 0.4228*** 0.3801*** 0.3902*** 0.4063*** 0.4049***
(0.0427) (0.0435) (0.0439) (0.0445) (0.0439) (0.0464) (0.0442) (0.0448) (0.0456) (0.0456)
λ0 − 19.2976*** − 4.6917* − 5.1780*** − 5.3872*** − 6.5106*** 2.6809 8.0966*** − 1.0744 − 5.7678*** − 5.3642***
(4.4180) (2.4051) (0.3850) (0.4112) (0.8420) (3.8632) (3.1237) (8.6434) (0.6197) (0.6200)
Observations 5,989 5,989 5,989 5,989 5,989 5,812 5,989 5,989 5,812 5,812

Note: In this table, we present the results of interaction terms between country-level resilience score, its sub-components and other macro characteristics. We use the
interaction terms to estimate whether sub-components and other macro variables could affect the equity market variance via improving the market’s resilience. There
is no simultaneous model in this table, as we have used the interaction terms of resilience score with its sub-components. The robust standard errors are reported in
parentheses.
***, ** and * indicates statistical significance at the 1%, 5% and 10% levels, respectively.

40
M. Uddin et al. Journal of Business Research 128 (2021) 31–44

Table 7 reports all other variables except the financial institutions development index
Impact of Market Resilience on Developed vs. Emerging Markets. (FII), as we have included the aggregate index, FDI. The growth in global and
local COVID-19 cases and deaths are also included in (2) and (3). Standard errors
(1) (2) (3)
are reported in parentheses.
Var Conditional Variance Process ***, ** and * indicates statistical significance at the 1%, 5% and 10% level,
CTC 4.0330*** 3.8783*** 3.7916*** respectively.
(0.7299) (0.7376) (0.7704)
EMG*CTC 0.1721 0.2757 − 0.0018
markets with similar overall resilience scores could reduce capital
(0.9719) (0.9789) (1.0223)
CTD 4.8344*** 5.4064*** 6.4624***
market volatility by 90.90% with a higher level of economic freedom
(0.5288) (0.5310) (0.5512) (see column 1). Likewise, with a higher level of infrastructure quality a
EMG*CTD − 2.7840*** − 3.2286*** − 3.8241*** market could reduce market volatility by 76.88 per cent. The coefficient
(0.7512) (0.7552) (0.7887) of OIN, however, suggests that, with a reduction of oil dependency by
CSC − 0.1642*** − 0.1146*** − 0.0957*
one unit, an economy would minimise the conditional variance of their
(0.0414) (0.0414) (0.0574)
EMG*CSC 0.6134*** 0.5987*** 0.6112*** equity market by 0.4177. The financial development index, health
(0.0704) (0.0712) (0.0958) pillar, development of financial institutions, productivity score and size
CSD 0.4878*** 0.4184*** 0.3747*** of the economy could reduce the volatility by 29.26%, 19.68%, 14.81%,
(0.0523) (0.0523) (0.0688) 4.38% and 0.05%, respectively, for countries with a similar level of
EMG*CSD − 0.6573*** − 0.6566*** − 0.6339***
(0.0890) (0.0904) (0.1187)
resilience scores (RES). However, these interaction terms are not sta­
EMG 0.1396*** − 3.0079*** − 2.2836 tistically significant in our model and for the period of study.
(0.0313) (0.6113) (4.6431) In Table 7, we check the robustness of the association by introducing
RES − 1.1023*** an interaction term of the resilience score and its sub-components with
(0.1329)
the emerging market dummy. Panel C of Table 3 shows that the
EMG*RES 0.6472***
(0.1382) descriptive statistics, such as the mean, median and variance of resil­
CPS − 0.5276** ience score, its sub-components and other country-level macro charac­
(0.2644) teristics of emerging markets, are statistically different from those for
EMG*CPS 0.2398 developed markets. Therefore, our objective is to see how the country-
(0.3466)
COG − 0.0279
level resilience dynamic is affecting the equity market volatility in two
(0.1529) different economic settings. For analytical purposes, we separate the
EMG*COG − 0.6429*** markets based on the definitions of the International Monetary Fund and
(0.1907) apply the conditional variance process determined in Section 3.2. Re­
MPR − 0.0692
sults of interest in Table 7 are generated from the coefficients of the
(0.0628)
EMG*MPR 0.0932 interactions terms. Findings suggest several interesting conclusions
(0.0634) about the emerging markets in comparison to developed markets in our
LGD 0.1126*** sample.
(0.0212) First, emerging markets could significantly reduce the adverse
EMG*LGD − 0.3262***
(0.0345)
impact of global COVID-19 news on equity variance by their economic
PRO − 0.2976** resilience and macro characteristics. For example, the interaction term
(0.1375) EMG*CTD is − 2.7840 in column (1) and becomes − 3.2286 and − 3.8241
EMG*PRO − 0.1493 in columns (2) and (3), respectively. That means, in the absence of
(0.1756)
resilience, its sub-components and other macro characteristics (see
OIN 0.3477***
(0.1186) column 1), emerging equity markets are less affected by global COVID-
EMG*OIN − 0.0163 19 deaths (CTD) as compared to developed markets by 278.40 per cent.
(0.2414) However, the variance in equity markets reduced by 322.86 per cent
INQ − 0.0029 with resilience and 382.41 per cent with sub-components and macro
(0.0034)
EMG*INQ 0.5437
characteristics. All these coefficients are statistically significant at the 1
(0.3878) per cent level. The risk associated with the growth in global COVID-19
HEL 0.0375 cases (EMG*CTC) is also reduced by 0.18% in column (3), but it is not
(0.9191) significant at the 10 per cent level.
EMG*HEL 0.5014
Second, the conditional variances of emerging equity markets are
(0.9569)
FDI − 0.8955*** more sensitive to country-level COVID-19 cases than deaths. The inter­
(0.1788) action term EMG*CSC is positive across Table 7, and it suggests that the
EMG*FDI 2.3223*** volatility increases with local COVID-19 cases (up to 61.34%) in
(0.2771) emerging markets. The interaction term EMG*CSD, on the other hand, is
α 0.0001 − 0.0167 − 0.0114
negative and it means that, compared to developed markets, the con­
(0.0136) (0.0154) (0.0177)
ditional variance is reduced (by up to 65.73% in column 1) with the
γ 0.4777*** 0.4605*** 0.4360***
growth in country-level COVID-19 deaths in an emerging market.
(0.0213) (0.0227) (0.0257)
δ 0.3448*** 0.3121*** 0.2297*** However, like the local cases, the risk associated with local deaths
(0.0375) (0.0369) (0.0371) hardly varies with the country-level resilience or macro strengths.
λ0 − 5.9238*** − 1.2724** − 4.8607 Third, surprisingly, the interaction term EMG*RES is positive in
(0.3278) (0.5841) (4.0841) column (2) of Table 7 and statistically significant at the 1 per cent level.
Observations 5,989 5,989 5,635 The coefficient (0.6472) implies that, in emerging markets, equity
Note: In this table we compare the impact of resilience, its sub-components and variance increases with their country-level resilience compared to a
other macro characteristics between developed and emerging markets within developed market. It further suggests that, during a shock, investors’
our sample countries listed in Table 2. Results in this table are generated from risk attitude in emerging markets may not be boosted by economic
interaction terms with the emerging market dummy. Column (1) reports the strength, and is instead impacted by the lack of sustainable develop­
results of COVID-19, column (2) reports the resilience score, and column (3) ment, the fragility of the economic structure, and the fragility of firm

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M. Uddin et al. Journal of Business Research 128 (2021) 31–44

performance. For example, Alfaro, Asis, Chari, and Panizza (2019) also been imposed in many emerging countries which are part of the
recently highlighted the exposure of emerging market firms to exchange global supply chain and therefore suffer severe supply disruption.
rate shocks. They find that larger firms in emerging markets are more In this paper, we have examined these direct and indirect effects of
financially vulnerable to shocks, and that shocks to sales growth of these the COVID-19 pandemic on stock market volatility and we have also
large firms are positively and significantly correlated with economic examined how certain economic factors can help to reduce the volatility
growth. Therefore, both firms and the economy suffer from unexpected shock so that we can avoid any potential financial crisis. Using data from
shocks. 34 developed and emerging countries, we have found that resilience
Fourth, relative to developed markets, the governance quality and scores (RES) could significantly reduce the equity market variance in
size of the economy are vital in reducing the equity variance in emerging both developed and emerging markets, but the magnitude of the nega­
markets. The interaction terms EMG*COG and EMG*LGD are − 0.6429 tive impact is higher in developed countries. The capitalism score (CPS),
and − 0.3262, respectively, in column (3) of Table 7, and these are sig­ governance score (COG), productivity score (PRO), health pillar (HEL)
nificant at the 1 per cent level. That indicates that, during a crisis, in­ and development of financial institutions index (FII) are the crucial
vestors in emerging markets give more importance to factors such as the determinants and could significantly reduce market volatility. In
capacity of the government to formulate and implement sound policies, developed markets, economic freedom, governance and productivity are
effective regulations in conflict resolutions, and shareholder governance more important than the other factors in facing a pandemic crisis.
within a country. Similarly, investors place importance on the size of an However, for emerging markets, their quality of health services and
economy as it helps to absorb a sudden shock such as COVID-19. The availability of infrastructure are far more critical. The central bank
productivity of emerging markets (EMG*PRO) could also reduce the strategy to reduce the policy rate is only working in emerging markets.
conditional variance by 14.93%, but it is not found to be statistically In the developed markets, lowering the policy rate creates further un­
significant in our sample. certainty about the future and increases the returns variance. Oil in­
Finally, the interaction of EMG*FDI is positive (2.3223) in column tensity is only relevant to the developed markets. The quality of
(3) and statistically significant at the 1 per cent level. This suggests that, financial institutions has a stronger negative effect on the equity market
relative to developed markets, the development of financial markets and variance in emerging countries. Interestingly, we have found that the
institutions makes emerging equity markets more sensitive to a shock impact on the developed economies is far more potent than that on the
such as COVID-19. emerging economies. In particular, the total number of COVID-19-
related deaths (CTD) has increased the return variance by five to six
4. Conclusion times more in developed capital markets compared to their emerging
counterparts. However, developed markets are more successful in
We have been going through the global COVID-19 pandemic for managing the market volatility than the emerging markets, as evidenced
several months now. The first case was recognised in China on 17th by the positive relationship between market volatility and the interac­
November 2019. Wuhan officials reported an epidemic in January tion term of emerging market and economic resilience. This essentially
2020.8 The first definitely identified case (albeit retrospectively) of the indicates the fragility in emerging market structure and lack of trust
virus in Europe was in Paris on 27th December 2019. The virus outbreak among investors in emerging stock markets. To further support this
has now reached almost every country in the world. The Coronavirus conjecture, this paper has found that governance quality is an important
Resource Center at John Hopkins University, USA, has reported that as factor that helps to mitigate stock market volatility in emerging coun­
of 29th January 2021 there were over 102 million COVID-19 cases tries. Therefore, in times of exogenous shocks such as a global pandemic,
across the world and there were over 2.2 million deaths caused by the emerging market investors rely more on the capacity of governments to
virus outbreak. In addition to this, the pandemic has had a significant formulate and implement sound policies and regulations to safeguard
indirect effect. Most European countries – with the notable exceptions of their interests.
Sweden and Belarus – have imposed lockdown for varying periods of The findings of this paper have confirmed the effect of fear arising
weeks, even though this has never been the response to any epidemic from the severity of a global pandemic on global stock markets. We need
before. All except seven US states (all with Republican governors) have to be very careful about the further effect of this significant volatility
also followed the lockdown route.9 Unsurprisingly, putting a country’s effect of the virus outbreak as it could lead us to a potential financial
entire population under lockdown for weeks on end is economically crisis. To avoid this, we can emphasise the selected economic factors
disastrous. The Bank of England has warned that the UK is entering the that we have found to be particularly effective in reducing volatility in
worst recession since the Great Frost of 1709, with output down by stock markets. Verma and Gustafsson (2020) emphasise the importance
almost 30% in the first half of 2020.10 At the peak of the furlough of an urgent policy response from the government to face the change
scheme, one-third of the UK workforce were being paid 80% of their caused by the global pandemic. The authors point out the necessity of
salary under the furlough scheme. 11How many of these people will find proactive and forward-looking business strategies and economic pol­
they are unemployed when the scheme ends is unknown. Similar gloomy icies. The findings of our paper will help governments and policymakers
figures are applicable to most other developed nations. Lockdowns have to investigate various country-level factors that may be of use to cope
with the situation. Doidge, Karolyi, and Stulz (2007) mention that
country-level factors are more important than firm-level factors to
8
“Coronavirus: China’s first confirmed COVID-19 case traced back to ensure discipline in the economy. Therefore, faced with economic
November 17”, South China Morning Post, 13th March 2020. turmoil due to the global pandemic, governments and policymakers can
9
“7 governors still haven’t issued stay-at-home orders. Here’s why”, CNN
politics, 13th April 2020.
10
“BoE warns UK set to enter worst recession for 300 years”, Financial Times,
7th May 2020.
11
“How the coronavirus crisis has hit the UK’s economic outlook”, The
emphasise the adoption and implementation of the right economic
Guardian, 27th May 2020.

8
“Coronavirus: China’s first confirmed COVID-19 case traced back to November 17”, South China Morning Post, 13th March 2020.
9
“7 governors still haven’t issued stay-at-home orders. Here’s why”, CNN politics, 13th April 2020.
10
“BoE warns UK set to enter worst recession for 300 years”, Financial Times, 7th May 2020.
11
“How the coronavirus crisis has hit the UK’s economic outlook”, The Guardian, 27th May 2020.

42
M. Uddin et al. Journal of Business Research 128 (2021) 31–44

policies by using a set of economic factors that we have shown to be effective.

Appendix A. Mean scores of resilience, its sub-components and other macro variables

RSE COG CPS INQ OIN PRO HEL FID FII

MARKET Mean Mean Mean Mean Mean Mean Mean Mean Mean
Australia 4.4794 4.3152 4.3932 4.2975 4.1824 3.6937 4.4040 0.8714 0.9275
Austria 4.5390 4.4458 4.2767 4.4886 4.3666 3.6910 4.4129 0.6273 0.7013
Belgium 4.4639 4.2931 4.2092 4.4577 3.9760 3.6084 4.3886 0.5846 0.6769
Brazil 3.8524 4.1967 3.9493 3.9753 4.1860 2.4608 4.3170 0.5934 0.6341
Canada 4.5017 4.5801 4.3529 4.3512 3.8581 3.6451 4.3845 0.8556 0.9030
China 3.7048 3.8786 4.0673 4.3015 4.4046 2.5871 4.3927 0.6448 0.6315
Czech 4.4624 4.2022 4.3000 4.4048 4.3869 3.3484 4.3791 0.3768 0.5579
Egypt 3.6251 4.0381 3.8407 4.1342 4.3122 2.2579 4.1927 0.3034 0.3304
Finland 4.5469 4.3606 4.3162 4.3823 4.2120 3.5733 4.3815 0.6626 0.6337
France 4.5012 4.3840 4.1558 4.5185 4.3683 3.5520 4.4054 0.7697 0.8877
Germany 4.5705 4.2224 4.2973 4.5197 4.3751 3.7041 4.4110 0.6872 0.7076
Greece 3.9239 4.0454 4.0553 4.2622 4.1280 3.0877 4.3702 0.5353 0.5651
Hungary 4.2057 3.9532 4.1744 4.3067 4.3843 3.1718 4.3232 0.4311 0.5138
India 3.8895 4.4465 4.0110 4.0904 4.4443 1.6449 4.1987 0.4241 0.3889
Indonesia 3.6604 4.2034 4.1866 4.0428 4.4257 2.2415 4.2341 0.3667 0.4397
Italy 4.2792 4.0781 4.1304 4.3967 4.3994 3.4034 4.4046 0.7912 0.7787
Japan 4.3656 4.2693 4.2781 4.5398 4.3035 3.5280 4.4597 0.8767 0.9400
Malaysia 4.1207 4.5395 4.3041 4.2968 4.2939 3.1470 4.3518 0.6786 0.6925
Mexico 3.7593 4.1510 4.1698 4.1904 4.2573 2.7262 4.3595 0.4028 0.4443
Netherland 4.4901 4.3245 4.3412 4.5545 4.1220 3.7728 4.4143 0.7017 0.7111
Norway 4.6052 4.5146 4.2905 4.2289 4.3994 4.0508 4.4233 0.6727 0.6099
Philippine 3.5201 3.7938 4.1558 3.8277 4.4335 1.8041 4.2297 0.3918 0.3952
Poland 4.4021 4.1587 4.2166 4.3242 4.3863 3.1747 4.3501 0.4766 0.6042
Singapore 4.4512 4.6052 4.4931 4.6052 NA 4.3340 4.4616 0.7487 0.7597
South Africa 4.0690 4.3232 4.0656 4.0883 4.2338 2.2903 4.0577 0.6267 0.7386
South Korea 4.1304 4.3528 4.2808 4.5379 3.9535 3.4530 4.4327 0.8685 0.8440
Spain 4.4402 4.3573 4.1851 4.5019 4.3020 3.4266 4.4076 0.8636 0.8736
Sweden 4.5448 4.4241 4.3202 4.4200 4.3570 3.7007 4.4062 0.7088 0.7475
Switzerland 4.5750 4.1748 4.4055 4.5689 4.4547 3.9143 4.4327 0.9312 0.9684
Taiwan 4.0994 4.4142 4.3477 4.3871 4.2485 3.7053 4.3741 NA NA
Thailand 3.7111 4.3734 4.2239 4.1142 4.1204 2.6449 4.3663 0.6991 0.7379
Turkey 3.8285 4.2734 4.1682 4.1841 4.4440 3.0571 4.3046 0.5160 0.4793
UK 4.5111 4.4979 4.3682 4.5006 4.3959 3.5529 4.3888 0.8525 0.9032
USA 4.5110 4.3635 4.3412 4.5077 4.1279 3.8748 4.3167 0.8768 0.8390
All 4.2159 4.2810 4.2256 4.3326 4.2801 3.2303 4.3570 0.6490 0.6838

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