Abstract
Financial markets reacted with a vengeance to the COVID-19 pandemic. We argue that while the spread of the pandemic is statistically significant in explaining changes to bond spreads, it has little additional explanatory power over variables that capture financial stress. Financial markets reacted as in any international financial crisis by penalizing emerging economies exposing existing vulnerabilities. This finding highlights the need for credible, but flexible, sovereign currencies and the need to build up liquidity reserves.
Data appendix
Dates: March 1st to May 11th, 2020.
List of countries: Armenia, Australia, Austria, Belgium, Bangladesh, Brazil, Canada, Chile, China, Colombia, Croatia, Cyprus, Czechia, Denmark, Egypt, Finland, France, Germany, Greece, Hungary, Iceland, Indonesia, India, Ireland, Israel, Italy, Japan, Kenya, Morocco, Mexico, Malta, Malaysia, Netherlands, Norway, New Zealand, Pakistan, Philippines, Portugal, Qatar, Romania, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, Taiwan and UK.
COVID-19 Daily data:https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases.
Exchange rates and Bond yields from the Global Financial Database.
Market indices: https://finance.yahoo.com/.
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