Risk aversion connectedness in developed and emerging equity markets before and after the COVID-19 pandemic

Abstract

This study investigates the dynamic connectedness across the variance risk premium in international developed and emerging equity markets based on a Bayesian time-varying parameter vector autoregressive methodology. The empirical results indicate that the total spillover index is on average 65.6%, indicating a high, albeit declining, level of interconnectedness across the investor sentiment in the three markets under review until early 2020. Following the COVID-19 outbreak though, the total investors' risk aversion connectedness – as expected – strengthens, but more importantly, its dynamics alter, indicating that the risk aversion of emerging markets is an important contributor to the connectedness of international markets. © 2020Variance risk premium; Diebold and Yilmaz; Spillovers; Emerging markets; Risk aversion; TVP-VAR; Covid; Financial crisis; Financial market; International finance; Behavioral economics; Econometrics © 2020