A New Approach to Assess Stock Market Risk-return and Volatility in the Context of Covid-19: a Study of Multiple Stock Markets

Abstract

The second decade of the 21st century was greeted with the rapid spread of the SARS-CoV virus. In March 2020, each country was forced to establish its own systems of restrictions and controls to mitigate contagion. This caused strong effects in the global economy, such as a substantial drop in stock prices. This unpredictable event caused abrupt and non-homogeneous changes in stock markets around the world at different stages of the so-called Covid-19 crisis, causing a state of alertness and concern among investors. This study examines the effects of Covid-19 on five major global stock indexes: Nasdaq 100, FTSE 100, CAC 40, DAX 30, and Nikkei 225. The data analysis focuses on the behavior of the mentioned indexes and thirty stocks listed in each index during the Covid-19 period from 2020 to 2021 and before the Covid-19 period from 2015 to 2019. This thesis is divided into two sections. The first section explains the mentioned assets’ behavior based on their return and risk; the Capital asset pricing model (CAPM) and Jensen's Alpha are applied in this section; the synthesized results reflect that the rate of return of the indexes was not homogeneous between them and between the selected stocks during the Covid-19 period, there are variations between the realized rate of return and the expected rate of return, there is an increase in financial risk and insistent in most of the indexes due to an increase in the beta coefficient, however this change is not significant between the two study periods. In the second section, the realized volatility, conditional volatility and conditional volatility are modeled and analyzed with the application of the Autoregressive models: ARCH and GARCH. The output indicated that unlike the period before Covid-19 pandemic, the indexes behaved in a similar way with slight differences, and they presented lower volatility ranges; a rapid and strong decline in the indexes in March 2020 was offset by a rapid recovery in the first 5 months of the Covid-19-Period; and the volatility is much more affected by the conditional variance and the conditional adjusted variance than in the previous period.