Do Stock Market Fear And Economic Policy Uncertainty Co-Move With Covid-19 Fear? Evidence From The Us And Uk

Document Type


Source of Publication

Studies In Economics And Finance

Publication Date



Purpose - The purpose of the paper is to investigate co-movement of major implied volatility indices and economic policy uncertainty (EPU) indices with both the health-based fear index and market-based fear index of COVID-19 for the USA and the UK to help investors and portfolio managers in their informed investment decisions during times of infectious disease spread. Design/methodology/approach - This study uses wavelet coherence approach because it allows to observe lead-lag nonlinear relationship between two time-series variables and captures the heterogeneous perceptions of investors across time and frequency. The daily data used in this study about the USA and the UK covers major implied volatility indices, EPU, health-based fear index and market-based fear index of COVID-19 for both the first and second waves of COVID-19 pandemic over the period from March 3, 2020 to February 12, 2021. Findings - The results document a strong positive co-movement between implied volatility indices and two proxies of the COVID-19 fear. However, in all the cases, the infectious disease equity market volatility index (IDEMVI), the COVID-19 proxy, is more representative of the stock market and exhibits a stronger positive co-movement with volatility indicts than the COVID-19 fear index (C19FI). This study also finds that the UK's implied volatility index weakly co-moves with the C19FI compared to the USA. The results show that EPU indices of both the USA and the UK exhibit a weak or no correlation with the C19FI. However, this study finds a significant and positive co-movemmit of EPU indices with IDEMVI over the short horizon and most of the sampling period with the leading effect of IDEMVI. This study's robustness analysis using partial wavelet coherence provides further strengths to the findings. Research limitations/implications - The investment decisions and risk management of investors and portfolio managers in financial markets are affected by the new information on volatility and EPU. The findings provide insights to equity investors and portfolio managers to improve their risk management practices by incorporating how health-related risks such as COVID-19 pandemic can contribute to the market volatility and economic risks. The results are beneficial for long-term equity investors, as their investments are affected by contributing factors to the volatility in US and UK's stock markets. Originality/value - This study adds following promising values to the existing literature. First, the results complement the existing literature (Rubbaniy et at, 2021c) in documenting that type of COVID-19 proxy matters in explaining the volatility (EPU) relationships in financial markets, where market perceived fear of COVID-19 is appeared to be more pronounced than health-based fear of COVID-19. Second, the use of wavelet coherence approach allows us to observe lead-lag relationship between the selected variables, which captures the heterogeneous perceptions of investors across time and frequency and have important insights for the investors and portfolio managers. Finally, this study uses the improved data of COVID-19, stock market volatility and EPU compared to the existing studies (Sharif et al, 2020), which are too early to capture the effects of exponential spread of COVID-19 in the USA and the UK after March 2020.








COVID-19, Wavelet COVID-19 fear index, EPU, IDEMVI, Wavelet coherence, COVID-19 health-based fear index, Implied volatility index

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Open Access