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. 2023 Apr:65:101118.
doi: 10.1016/j.jfs.2023.101118. Epub 2023 Feb 9.

Portfolio diversification during the COVID-19 pandemic: Do vaccinations matter?

Son Duy Pham  1 , Thao Thac Thanh Nguyen  1 , Hung Xuan Do  1   2 , Xuan Vinh Vo  2
Affiliations

Portfolio diversification during the COVID-19 pandemic: Do vaccinations matter?

Son Duy Pham et al. J Financ Stab. 2023 Apr.

Abstract

The COVID-19 vaccine rollout expects to mitigate the severe negative impacts of the pandemic on global financial markets. Our study provides supporting evidence for this expectation. We find robust evidence that vaccinations significantly reduce the cross-country stock volatility connectedness among G7 nations, suggesting that the diversification benefits of an international equity portfolio may be enhanced during the pandemic when vaccinations accelerate. We present two explanations for this result. First, the vaccine deployment improves stock market return and decreases individual stock market volatility. Second, the vaccine rollout helps a country's stock market be more resilient to exogenous shocks. We further demonstrate that a global portfolio using a tactical allocation rule based on the intensity of vaccinations can outperform a buy-and-hold portfolio in terms of risk-adjusted returns.

Keywords: COVID-19 vaccinations; Multivariate heterogeneous autoregressive model; Performance evaluation; Portfolio diversification; Volatility connectedness.

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Figures

Fig. 1
Fig. 1
The Evolution of Realized Volatility of G7 Stock Markets during the COVID-19 Pandemic. The figure shows the time evolution of realized variances of G7 stock markets.
Fig. 2
Fig. 2
The Long-memory Characteristic of Realized Volatility. These figures show the auto-correlogram up to 50 lags of the realized volatility of G7 stock markets.
Fig. 3
Fig. 3
Dynamics of the Total Connectedness Index. The figure plots the Total Connectedness Index among G7 stock markets between January 2020 and October 2021.
Fig. 4
Fig. 4
Dynamics of the Volatility Dependence Index. The figure shows the time evolution of the Volatility Dependence Index (VDI) of G7 stock markets between January 2020 and October 2021.
See this image and copyright information in PMC

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