On the determinants of price fluctuations during the COVID-19 pandemic: Evidence from US equity markets

Abstract

Global crises often present significant threats to the well-being of individuals, businesses, and entire economies because of their widespread impact and severe repercussions. This study aims to pinpoint crucial factors influencing volatility in US sectoral stock indices during the COVID-19 pandemic. A Beta-Skew-t-EGARCH framework is used to model the changing patterns of volatility in each sector’s returns over time. The empirical analysis relies on both the elastic net penalization approach and the partialingout LASSO instrumental-variables regression. The findings reveal that the predominant variables explaining sectoral volatility include trading volume, stringency of US policy responses, volatility of broad USD exchange rates, Google search trends of market sectors, positive cases of coronavirus, US economic policy uncertainty, Google search volume for coronavirus, VIX, and the roll-out of vaccination programs. On the other hand, Bitcoin, treasury bills, gold, default risk, and Chinese stock prices do not have a meaningful impact on the price swings for all sectors. A thorough understanding of the factors underlying sectoral volatility enables portfolio managers to devise sensible investment decisions, and policy makers to lay down regulations intended to curb excessive volatility.