Volatility impacts on the European banking sector: GFC and COVID-19

Jonathan A. Batten; Tonmoy Choudhury; Harald Kinateder; Niklas F. Wagner

doi:10.1007/s10479-022-04523-8

Volatility impacts on the European banking sector: GFC and COVID-19

Jonathan A. Batten^*
, Tonmoy Choudhury
, Harald Kinateder
, Niklas F. Wagner

^*Corresponding author for this work

Interdisciplinary Research Center for Finance and Digital Economy

Research output: Contribution to journal › Article › peer-review

64 Scopus citations

Abstract

This paper analyses the volatility transmission between European Global Systemically Important Banks (GSIBs) and implied stock market volatility. A Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity model is applied to determine the dynamic correlation between returns of Europe’s GSIBs and the world’s most prominent measure of market “fear”, the CBOE Volatility Index (VIX). The results identify a higher negative co-relationship between the VIX and GSIB returns during the COVID-19 period compared with the Global Financial Crisis (GFC), with one-day lagged changes in the VIX negatively Granger-causing bank returns. The asymmetric impact of changes in implied volatility is examined by quantile regressions, with the findings showing that in the lower quartile–where extreme negative bank returns are present–jumps in the VIX are highly significant. This effect is more pronounced during COVID-19 than during the GFC. Additional robustness analysis shows that these findings are consistent during the periods of the Swine Flu and Zika virus epidemics.

Original language	American English
Pages (from-to)	335-360
Number of pages	26
Journal	Annals of Operations Research
Volume	316
Issue number	2
DOIs	https://doi.org/10.1007/s10479-022-04523-8
State	Published - 18 Feb 2022

Bibliographical note

Funding Information:
Open Access funding enabled and organized by CAUL and its Member Institutions. Tonmoy Choudhury would like to acknowledge the support of Edith Cowan University for financial assistance under grant number G1004390.

Publisher Copyright:
© 2022, The Author(s).

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 3 Good Health and Well-being
SDG 10 Reduced Inequalities

Keywords

COVID-19
DCC-GARCH
Europe
GFC
Global systematically important banks
Implied volatility
Swine Flu (H1N1)
Zika virus

ASJC Scopus subject areas

General Decision Sciences
Management Science and Operations Research

Access to Document

10.1007/s10479-022-04523-8

https://link.springer.com/article/10.1007/s10479-022-04523-8

Cite this

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title = "Volatility impacts on the European banking sector: GFC and COVID-19",

abstract = "This paper analyses the volatility transmission between European Global Systemically Important Banks (GSIBs) and implied stock market volatility. A Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity model is applied to determine the dynamic correlation between returns of Europe{\textquoteright}s GSIBs and the world{\textquoteright}s most prominent measure of market “fear”, the CBOE Volatility Index (VIX). The results identify a higher negative co-relationship between the VIX and GSIB returns during the COVID-19 period compared with the Global Financial Crisis (GFC), with one-day lagged changes in the VIX negatively Granger-causing bank returns. The asymmetric impact of changes in implied volatility is examined by quantile regressions, with the findings showing that in the lower quartile–where extreme negative bank returns are present–jumps in the VIX are highly significant. This effect is more pronounced during COVID-19 than during the GFC. Additional robustness analysis shows that these findings are consistent during the periods of the Swine Flu and Zika virus epidemics.",

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author = "Batten, \{Jonathan A.\} and Tonmoy Choudhury and Harald Kinateder and Wagner, \{Niklas F.\}",

note = "Funding Information: Open Access funding enabled and organized by CAUL and its Member Institutions. Tonmoy Choudhury would like to acknowledge the support of Edith Cowan University for financial assistance under grant number G1004390. Publisher Copyright: {\textcopyright} 2022, The Author(s).",

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doi = "10.1007/s10479-022-04523-8",

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AU - Kinateder, Harald

AU - Wagner, Niklas F.

N1 - Funding Information: Open Access funding enabled and organized by CAUL and its Member Institutions. Tonmoy Choudhury would like to acknowledge the support of Edith Cowan University for financial assistance under grant number G1004390. Publisher Copyright: © 2022, The Author(s).

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N2 - This paper analyses the volatility transmission between European Global Systemically Important Banks (GSIBs) and implied stock market volatility. A Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity model is applied to determine the dynamic correlation between returns of Europe’s GSIBs and the world’s most prominent measure of market “fear”, the CBOE Volatility Index (VIX). The results identify a higher negative co-relationship between the VIX and GSIB returns during the COVID-19 period compared with the Global Financial Crisis (GFC), with one-day lagged changes in the VIX negatively Granger-causing bank returns. The asymmetric impact of changes in implied volatility is examined by quantile regressions, with the findings showing that in the lower quartile–where extreme negative bank returns are present–jumps in the VIX are highly significant. This effect is more pronounced during COVID-19 than during the GFC. Additional robustness analysis shows that these findings are consistent during the periods of the Swine Flu and Zika virus epidemics.

AB - This paper analyses the volatility transmission between European Global Systemically Important Banks (GSIBs) and implied stock market volatility. A Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity model is applied to determine the dynamic correlation between returns of Europe’s GSIBs and the world’s most prominent measure of market “fear”, the CBOE Volatility Index (VIX). The results identify a higher negative co-relationship between the VIX and GSIB returns during the COVID-19 period compared with the Global Financial Crisis (GFC), with one-day lagged changes in the VIX negatively Granger-causing bank returns. The asymmetric impact of changes in implied volatility is examined by quantile regressions, with the findings showing that in the lower quartile–where extreme negative bank returns are present–jumps in the VIX are highly significant. This effect is more pronounced during COVID-19 than during the GFC. Additional robustness analysis shows that these findings are consistent during the periods of the Swine Flu and Zika virus epidemics.

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ER -

Volatility impacts on the European banking sector: GFC and COVID-19

Abstract

Bibliographical note

UN SDGs

Keywords

ASJC Scopus subject areas

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