Emerging Markets Finance and Trade · 2020 · 230 citations · 17 references
Volatility ModelingEpidemiological DynamicDisease Outbreak ChannelCovid-19 EpidemiologyCovid-19Economic ForecastingInternational FinanceManagementStatisticsInfectious Disease EpidemiologyEconomicsPredictive AnalyticsCovid-19 PandemicExchange Rate ReturnInternational TransmissionForecastingFinanceEpidemiologyExchange Rate MovementBusinessVolatility PredictionsInternational RiskEpidemic IntelligenceMarket TrendFinancial Crisis
We provide novel evidence that disease outbreaks contain valuable information that can be used to enhance exchange rate return and volatility predictions. Our analysis exploits the novel coronavirus (COVID-19) outbreak as a good experimental setup to test our intuition. Data show that the COVID-19 outbreak has been rapid and deadly. Using the total number of infections per million, we demonstrate that COVID-19 has better predictive power over volatility than over returns for a one-day ahead forecast horizon. Conversely, COVID-19 tends to shape returns more than volatility over a five-day ahead forecast horizon. Our findings remain intact over the two forecast horizons using the total number of deaths per million as an alternative COVID-19 measure. This evidence supports a new channel of exchange rate return predictability, namely the disease outbreak channel.
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