Pandemic Sway on Stock Indices and Exchange Rates

Abstract

The rationale of this study is to check for the presence of volatility in stock index and exchange rate of the economies under study, namely China, Japan, Italy, United Kingdom and New Zealand, due to the pandemic that hit us in 2020 i.e. COVID-19. In the first section of this study, the pandemics impact on different economies have been explored. It is followed by the scrutinization of the links between pandemic and stock index and pandemic and exchange rates in the second section. Section three provides the method for the testing of hypothesis, including data, sample, econometric model, and data tests. Daily time series data was taken for the indexes and exchange rates. Augmented Dickey Fuller (ADF) test was applied for the checking of Unit root, followed by correlogram, equation estimation i.e. Autoregressive Conditional Heteroskedasticity (ARCH) effect, and followed by the Generalized Autoregressive Conditional Heteroskedasticity GARCH (1, 1) model. The results in section 4 showed that the exchange rate of China did not qualify for GARCH as they had no ARCH effect, while its stock index showed volatility. All the other economies showed ARCH effect. High shocks were persistent in two of the remaining four economies exchange rates, while high shocks were persistent in all the remaining four stock indices. Volatility was present in all economies understudy except for China’s exchange rate.