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JCEFTS
14,1 The impact of COVID-19 on the
standard & poor 500 index
sectors: a multivariate generalized
18 autoregressive conditional
heteroscedasticity model
Maha Elhini
Department of Economics, The British University in Egypt, Cairo, Egypt, and
Rasha Hammam
Misr International University, Cairo, Egypt

Abstract
Purpose – This paper aims to examine the impact of the daily growth rate of COVID-19 cases in the USA
(COVIDg), the Federal Fund Rate (FFR) and the trade-weighted US dollar index (USDX) on S&P500 index daily
returns and its 11 constituent sectors’ indices for the time period between January 22, 2020, until June 30, 2020.
Design/methodology/approach – The study uses the multivariate generalized autoregressive
conditional heteroscedasticity (MGARCH) model to gauge the impacts over the whole period of study, as well
as over two sub-periods; first, January 22, 2020, until March 30, 2020, reflecting uncertainty in the US markets
and second, from April 1, 2020, until June 30, 2020, reflecting the lockdown.
Findings – Results of the MGARCH model reveal a negative and significant relation between COVIDg and
S&P500 index daily returns over the first sub-period and the whole study period in the following sectors, namely,
communications, consumer discretionary, consumer staples, health, technology and materials. Yet, COVIDg
showed a positive and significant relation with S&P500 index daily returns during the second time period in the
following sectors, namely, communication, consumer discretionary, financial, industrial, information technology
(IT) and utilities. Besides, USDX showed a negative significant effect on S&P500 index daily returns and on the
daily return on each of its 11 constituent sectors over the second sub-period and the whole period. Further, FFR
showed a significant effect only in the second sub-period, specifically, a negative effect on the daily return of the
financial sector and a positive effect on the daily return of the technology sector index. Nevertheless, FFR had a
positive significant effect on the daily return of the utilities sector index for the whole period under study.
Research limitations/implications – The impact of the crisis on the S&P500 index can be assessed
only with some limitations owing to available global data and the limited time frame of the lock-down.
Practical implications – The study proposes supporting a smooth, functioning and resilient financial
system; increasing fiscal measures by the US Government to increase liquidity on constraints; measures by
The Federal Reserve to alleviate US dollar funding shortages; support market integrity; ensure continuous
transparency and sharing of information; support the health sector, as well as consumer-based sectors that
faced demand shocks and facilitate investments in the technology sector.
Originality/value – The originality of this paper lies in the examination of the impact of the novel COVID-
19 pandemic on each of the 11 sectors constituting the S&P500 index separately, reflecting how the main
economic sectors formulating the US economy reacted to the shock during the peak time of the pandemic to
observe a full picture of the economic consequences amid the pandemic.

Journal of Chinese Economic and

Keywords COVID-19, Federal fund rate, Trade weighted US dollar index, S&P 500 index sectors
Foreign Trade Studies
Vol. 14 No. 1, 2021 Paper type Research paper
pp. 18-43
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-08-2020-0049 JEL classification – E44, G1
1. Introduction Impact of
Over the history of the US stock market, no infectious disease outbreak had more than a COVID-19
minor effect on the market’s volatility. Recent data from the COVID-19 pandemic, however,
reveals a dramatically different story, where the COVID-19 pandemic spurred
unprecedented violent moves in the US stock market. Such sensitivity gives rise to the
importance of studying relations between infectious diseases, namely, the recent COVID-19
and global macroeconomic shocks related to individual risk-taking behaviors impacting
investment decisions, income and consumption, that, in turn, have grave implications on 19
public health and the world economy.
The impact of the COVID-19 pandemic on the US stock market sectors was multifold.
The depth of the shock and its timing impacted the sectors of the S&P 500 index
dissimilarly, spurring contrasting reactions. Firms across different economic sectors faced
catastrophic losses, which threatened their daily operations, lowering their stream of
expected cash flows. The pandemic, however, has not been equally daunting to all firms and
industries alike. Questions were raised on which sectors have suffered a collapse in their
stock prices, while others may have benefited from the pandemic and the resulting
lockdown. The contribution and value of this paper lies in its attempt to answer these
questions and gauge the differential reactions of the S&P500 index sectors to the global
pandemic shock. The study uses the multivariate generalized autoregressive conditional
heteroscedasticity (MGARCH) model to identify the impact of the daily growth rate of
COVID-19 (COVIDg) reported cases in the USA, the Federal Fund Rate (FFR) and the trade
weighted US dollar index (USDX) on S&P500 index daily returns. The model is run for each
sector separately, namely, communication services, consumer discretionary consumer
staples, energy, financials, health care, industrials, materials, real estate, technology and
utilities. Three-time periods were studied, initially, the period between January 22 2020 until
June 30 2020 and two sub-periods – January 22 2020 until March 30 2020 reflecting
uncertainty in the US markets and from April 1 2020 until June 30 2020 reflecting lockdown.
The paper is organized as follows. Section 2 following the introduction reflects the
literature review highlighting the main studies tackling the impact of financial
macroeconomic variables, namely, money supply, interest rates and exchange rates on stock
market returns, as well as impacts of historical crises on stock markets. Section 3 presents a
brief background of the trends of FFR, USDX and S&P500 index return over the period of
study. Section 4 presents the model, data used and methodology. Section 5 discusses the
empirical findings. Section 6 concludes and proposes policy implications.

2. Literature review
Research on the influences of worldwide shocks and events including pandemics on stock
market returns has always been a crowded area and an area of interest for academics and
policymakers. This is owing to the importance of asset price-shaping factors that influence
investors’ decisions on the national, international, macroeconomic and microeconomic levels.
Bilson et al. (2000) advocate that national macroeconomic factors affect stock markets more
than international factors. In this light, a question arises whether this relationship holds during
times of severe crisis such as the COVID-19 pandemic in the US economy. The major role in the
determination of stock prices is attributed to macroeconomic changes such as interest rates,
gross domestic product (GDP), money supply, inflation and exchange rates. King (1966)
suggests that stock markets are affected by macroeconomic factors by an average of 50%.
Such alterations have varying repercussions that may result in higher market values in certain
stocks while lower market values in others. The total impact, however, an alternate via
variations in the stock market index (Bilson et al., 2000). The following section first, highlights
JCEFTS the studies tackling the impact of financial macroeconomic variables, namely, money supply,
14,1 interest rates and exchange rates on stock market returns and the second reviews the impacts
of COVID-19 and earlier pandemics on stock markets.

2.1 The impact of financial macroeconomic variables on stock market returns

2.1.1 The impact of money supply and interest rates on stock market returns. Theoretical
20 models discussing the relation between money supply and stock markets involve two broad
categories, the utility-maximizing-representative agent framework embedded in financial
economics, and the more traditional approach in structural macroeconomic models. The first
approach uses real consumption-based asset pricing models, Sharpe (1964), Lintner (1965),
Mossin (1966) and Black (1972), Breeden (1979), which posits that for money to be held in a
general equilibrium assets price model, it has to yield a non-pecuniary return that is greater
than zero. Otherwise, it will be dominated by interest-bearing assets. The second approach
postulates aggregate relationships between variables (Sellin, 1998). These multifactor
models were further introduced by Ross (1976), in developing the arbitrage pricing theory
(APT), which posits that monetary policy influences stock market returns regardless of
considering the business cycle in the model. This shows both positive and negative
relationships between monetary policy shocks and stock prices.
Empirical evidence suggests that stock market returns are adversely related to the
expected and unexpected rates of inflation explained by a form of market imperfection.
Monetary policy that is counter-cyclical yields a negative relation between inflation and
stock returns, whereas a pro-cyclical monetary policy will lead to a positive relation. It may
be concluded that in the long-run, stocks provide a good hedge against expected and
unexpected inflation (Sellin, 1998). On the other hand, in the short run, Keynesian economics
advocates that sticky prices imply irresponsive stock prices to monetary shocks, as interest
rates adjust to accommodate equilibrium in the money market. Keynesian theory claims that
money supply changes will impact stock prices only if it changes the expectations about
future Fed policy and/or causes changes in the future interest rates. Larger money supply
will lower stock prices because of expectations of higher future interest rates, and lower
future sales resulting from lower economic activity. In this light, Keynesians expect a
positive relationship between changes in the FFR and stock prices in the long run, via a
negative relationship between money supply and stock prices (Cornell, 1983). A rise in
interest rates may lead to raising financing costs, by that, reducing firm profitability and
stock prices (Orawan and Sharma, 2007).
Interest rate variations may have an impact on the discount rate that investors use in
computing companies’ current worth of projected cash flows, that is, the alteration of the
risk-free-rate that influences companies’ expected returns. Moreover, it may affect the
expectations of firms’ projected performance. Such alterations influence the projected cash
flow market members use for predicting the current worth of a company (Bernanke and
Kuttner, 2005; Ioannidis and Kontonikas, 2008; Lobo, 2000; Khan and Javed, 2016).
Alternately, the real activity theory, states that an announcement of a bigger money supply
provides information about future money demand (accommodated by the Fed), which is
caused by higher future expected output. Higher future expected output would, in turn, raise
the company future earnings leading to higher expected future sales, and therefore, higher
stock prices. The real activity theorists, therefore, expect a negative relationship between
changes in the FFR and stock prices, as they posit a positive relationship between changes
in the money supply and stock prices. These competing theories make it difficult to predict
relationships between stock prices and interest rates a priori (Cornell, 1983).
 Earlier, during the 2008 financial crisis, FFR has witnessed its lowest rate ever with a Impact of
zero-lower bound. Studies on the US stock market have documented a positive response to COVID-19
expansionary monetary policy shocks, with a stronger reaction during times of recession
and negative economic growth (Basistha and Kurov, 2008; Kurov, 2010). However, since the
beginning of the 2008 financial crisis and its associated credit crunch until early 2009, stock
markets have faced falling stock prices along with sharp interest rate cuts, indicating a
weakened inverse relation between interest rates and stock market valuation (Saggu et al.,
2013). The surprise, however, was a positive relation between FFR and stock returns (Saggu 21
et al., 2013). A study covering the timespan prior, during and after the financial crisis by
Huang et al. (2016), showed the response of US stock markets for weekly data from January
3, 2003 to March 27, 2015 to oil price fluctuations, exchange rates and US real interest rates
showing a higher correlation and a magnified impulse response when real interest rates
become negative in early 2009. Park and Shin (2020) studied foreign banks’ exposure on the
local and regional levels to the 2008 global financial crisis and found that emerging
economies’ banks were more directly and indirectly exposed to the global financial crisis
and suffered more capital outflows than developed economies (Agosto et al., 2020). However,
a regional contagion effect of the financial crisis was evident on stock markets with
differential impacts on sectors. Regions that were the most vulnerable to the 2008 global
financial crisis were emerging Asian and European economies (Kenourgios and Dimitriou,
2015). Further research on the impact of the global financial crisis was on its impacts on the
G7 and Brazil, Russia, India, China, and South Africa (BRICS) countries by Wang et al.
(2017) found that the multi-fractal contagion effect depended on the recipient country and
the time scale.
McKibbin and Fernando (2020) examine the impacts of how COVID-19 may evolve by
quantifying the potential global economic costs of COVID-19 under different scenarios.
They propose different macroeconomic outcomes in the financial markets in a global hybrid
dynamic stochastic general equilibrium/computable general equilibrium general equilibrium
model, building on past experience attained from evaluating the economics of severe acute
respiratory syndrome (Lee and McKibbin, 2004) and pandemic influenza (McKibbin and
Sidorenko, 2006). Results from aggregate demand and risk shocks showed a large drop in
consumption and investments, as well as a sharp drop in equity markets. The sharp drop in
equity markets is owing to increased risk and also owing to the anticipated economic
slowdown and fall in expected profits. As a result, funds shifted from equity markets into other
channels overseas, bonds and driving down interest rates as a response from central banks
(McKibbin and Fernando, 2020). Response magnitudes differ across countries, although
patterns of sharp shocks followed by gradual recovery is common across countries. As a result,
a global reallocation of financial capital flows are expected out of highly affected economies
such as China and other emerging economies and into safer more financially advanced
economies such as the US, Europe and Australia (McKibbin and Fernando, 2020).
Interest rate changes also impact stock markets sector-wise, as provided by Ehrmann
and Fratzscher (2004). Their study finds that a 25-basis point cut in the Federal Fund target
rate is associated with a 1% increase in broad stock indexes. The study concludes that the
technology and the telecommunications sectors are the most responsive to changes in
monetary policy because of their cyclical nature, as interest rates serve as an indicator to the
economic business cycle. Results show that these sectors are the most sensitive to interest
rate changes, whereas average responses are evident in the financial, industrial and basic
material sectors, while the least responsive industries are food, agriculture and beverages.
2.1.2 The impact of exchange rates changes on stock market returns. Foreign exchange
rate movements provide a proxy measure to explore the effects of foreign countries on the
JCEFTS US economy. Foreign exchange markets are important for monetary and fiscal policy-
14,1 making decisions owing to the following reasons. First, policymakers prefer a less expensive
currency to boost exports. Such policy must be monitored, as it may depress the stock
market. Second, the link between the two markets may be used to predict the path of the
exchange rates, which will benefit multinational corporations in managing their exposure to
foreign contracts and exchange rate risks. Third, currency is more often being included as
22 an asset in investment funds’ portfolios (Dimitrova, 2005).
Two sets of theoretical models, flow and stock-oriented models are known to explore the
relation between foreign exchange markets and stock markets. Dornbusch and Fischer
(1980) belong to the flow-oriented models, assuming that a country’s current account and
trade balance performance are two vital factors that determine exchange rates, hence, giving
rise to the conclusion that stock market prices and exchange rates are positively-related.
Stock-oriented models advocate that a country’s capital account is the major determinant of
its exchange rate (Alagidede et al., 2011). Fang and Miller (2002) studied the relationship
between exchange rates and stock market volatility in Korea during the Asian financial
crisis. The study finds that currency depreciation shows statistically significant negative
impacts on stock market returns. Khalid and Kawai (2003), Ito and Yuko (2004), suggest that
the link between stock markets and currency markets helped in propagating the Asian
Financial Crisis in 1997.
Moreover, a positive relation was identified between stock markets and foreign exchange
markets during crisis and non-crisis periods irrespective of whether in developed or emerging
economies (Do et al., 2015). In developed economies, exchange rate changes have shown a
positive impact on stock prices (Roll, 1992). A positive uni-directional spillover effect was also
identified from exchange rates to stock prices in emerging economics, namely, South Korea,
India and Pakistan, that lasted for a longer duration than in developed economies (Abdalla and
Murinde, 1997). The duration of the spillover effects of exchange rates on stock indexes mainly
depended on the economic policy of a nation – where in EU countries it lasts for a longer period
of time (Tsagkanos and Siriopoulos, 2013). The change in the value of a currency against the
US dollar has a major spillover effect on the performance of its stock indices (Mahalakshmi
et al., 2016). Within the BRICS countries, the dominance of the US dollar over the BRICS stock
market shows a fall in all markets for a rise in US Dollar and vice versa, indicating a large
dependency on the US Dollar (Naresh et al., 2018).

2.2 Impacts of COVID-19 and earlier pandemics on stock market returns

Historically, much research focused on the macroeconomic effects of disasters, where a
disaster is defined as a cumulative decline in real per capita GDP or real per capita
consumption over one or more adjacent years by 10% or more (Barro et al., 2020). Abiding
by this definition, the three critical adverse global macroeconomic disasters since 1870 were
World War I, the Great Depression of the early 1930s and World War II. Furthermore, Barro
and Ursúa, 2008 as cited in Barro et al. (2020), suggest that the Great Influenza Pandemic of
1918–1920 was the fourth largest negative macroeconomic shock worldwide. The Great
Influenza Pandemic of 1918–1920 exemplifies an applicable worst-case scenario for
pandemics with global reach such as COVID-19. Hence, they explored flu-related, as well as
war-related deaths during 1918–1920 and their relation to economic declines (GDP and
consumption) in 48 countries. Results show that 12 out of 48 countries were found to have
macroeconomic disasters based on GDP with trough years between 1919 and 1921. The first
part of the paper assessed the impacts of flu deaths and war deaths on differential changes
across countries in rates of economic growth showing negative relations. The second part
explored the effects of pandemics and war-related death rates on two types of assets, stocks
and short-term government bills. Results showed that the 1918–1920 Great Influenza Impact of
Pandemic led to decreases in stock prices worldwide, and increases in stock market COVID-19
volatility. The study concluded that death rates led to GDP declines by 6% and 8% for
private consumption. Such outcomes can be also comparable to those seen during the global
financial crisis of 2008–2009 for their sharing the same global economic contraction. How
likely these past events’ outcomes are reflected on COVID-19 is yet remote owing to the
limited span of time in which the pandemic reached a peak (Barro et al., 2020).
A study by Jordà et al. (2020), explored rates of return on assets using data dating back to 23
14th century Europe that focuses on 19 major pandemics. Namely, the pandemics range
back from the Black Death, Spanish Flu, Asian Flu, Encephalitis lethargica pandemic, Third
cholera pandemic, until the First and Second cholera pandemics. The study found that
returns to assets showed huge responses given the limited scope of data. On the other hand,
smaller volatilities are found in other economic areas such as real wages. These findings
indicate that pandemics are followed by continual periods (over multiple decades) of
depressed investment opportunities due to surplus capital per labor and/or increasing
willingness to save, and precautionary saving measures for the renewal of depleted wealth
(Jordà et al., 2020). The authors argue that experiences from past disasters may provide
thoughts on dealing with the current pandemic, albeit after a longer period of time.
A recent study by Ashraf (2020) discusses stock market responses to the COVID-19
pandemic using daily COVID-19 cases and stock market returns data from 64 countries for
the period January 22, 2020 until April 17, 2020. The study examines the impacts of changes
in COVID-19 cases and deaths on stock market returns, showing that stock markets react
strongly with negative returns to growth in confirmed cases, while responses to the growth
in deaths is not statistically significant (Ashraf, 2020). Further recent research on the
differential impact of COVID-19 on S&P1500 stock market sectors’ reaction to the pandemic
during the month of March 2020 by Mazur et al. (2020), reveals that the crude petroleum
sector was the most negatively affected by the pandemic. In contrast, the natural gas and
the chemicals sectors were positively affected and their market valuations earned positive
returns, on average. Firms that performed exceptionally well during the crash
include healthcare, food, software, technology and natural gas. On the other hand, the crude
petroleum, real estate, hospitality and entertainment sectors witnessed a rapid decline
(Mazur et al., 2020). Also, Okorie and Lin, 2020 examine the fractal contagion effect of the
COVID-19 pandemic on stock market information of the highest 32 coronavirus affected
economies. They sampled for ex-ante and ex-post COVID-19 outbreak analysis using the
de-trended moving cross-correlation analysis and de-trended cross-correlation analysis
techniques. Results show a fractal contagion effect of the COVID-19 pandemic, however, this
fractal contagion effect fades out over time. Furthermore, a panel regression analysis for 75
countries by Erdem (2020), gauges the impact of Covid-19 on the countries’ market index
returns and volatilities. The study focuses on how investors react to different coronavirus
data announcements. Results indicate that the pandemic has significant negative effects on
stock markets that is decreasing returns and increasing volatility.
Another recent study by Al-Awadhi et al. (2020), explores the impact of the COVID-19
pandemic on the Chinese stock market, via using a panel regression model. The study uses
the daily growth in total confirmed cases and the daily growth in total deaths caused by
COVID-19. Results show significant and negative relations of both measurements on stock
returns across all companies included in the Hang Seng Index and Shanghai Stock
Exchange Composite Index for the period between January 10 to March 16 2020. In The
Shanghai Stock Exchange Composite Index, the following sectors are considered, namely,
finance, properties, conglomerates, industrials, public utility and commerce. Initial results
JCEFTS show an insignificant difference in returns between sectors. When considering only 10 out of
14,1 82 sectors, the results show that information technology and medicine manufacturing
sectors performed significantly better than the market average, while stock returns of
beverages, air transportation, water transportation and highway transportation sectors
performed significantly worse during the COVID-19 outbreak (Al-Awadhi et al., 2020).
Studies such as Ferguson et al. (2020) place the Covid-19 crisis as the most serious
24 pandemic since 1918 (Jordà et al., 2020). The authors propose that if the trends continue
during the expected second outbreak to be similar to the first one, then the global economic
trajectory will witness a downturn worse than was anticipated. It is, nevertheless, too early
to determine definite trajectories, as the percentage death toll to the world population is
smaller than historical pandemics; also because the age structure that was most affected by
the pandemic is yet unclear. The authors advocate that on the macroeconomic level,
nevertheless, efforts of fiscal expansion to curb impacts of the pandemic are being seen to
boost public debt hence, reducing national savings worldwide (Jordà et al., 2020).

3. Trends of federal fund rate, trade weighted US dollars index and S&P 500
index return over the period of January 2020-June 2020
The COVID-19 outbreak caused remarkable human and economic hardships across the US
and around the world. Figure 1 depicts the trends in FFR and S&P500 index return at the
onset of the first COVID-19 case in 22 January 2020 until the end of June 2020, while Figure 2
shows the trends in US dollar (USDX) and S&P500 index return for the same period of time.
The implications of global developments on the economic outlook, as well as muted
inflation pressures, pushed the Federal Open Market Committee (FOMC) to set the FFR
between 1.5% and 1.75% since late 2019. This level continued throughout January and
February 2020 to support the sustained expansion of economic activity and strengthen labor
market conditions (FED Monetary Policy Report, Feb 2020). The USDX showed a slight
depreciation in January followed by an appreciation in February amounting to 1.9% against
major global currencies since the beginning of 2020. Consequently, S&P500 index returns
showed stable to moderate increases in January and February, supported by greater
certainty among investors, that monetary policy would remain accommodative in the near
future (FED Reserve Bank of New York Report, Feb. 2020).

10

5
S&P 500 index daily return (%)

0
Federal Fund Rate (%)

2.0
–5
1.6
–10
1.2
–15
0.8

0.4

Figure 1. 0.0
Jan Feb Mar Apr May Jun
Daily federal fund
rate and daily S&P 2020
500 index return (Jan
S&P 500 Index daily Return (%)
2020–June 2020)
Daily Federal Fund Rate (%)
 10 Impact of
5 COVID-19

S&P 500 index daily return (%)

Trade Weighted US dollar index

0
128 –5
126
–10
124
122 –15
25
120
118
116 Figure 2.
114 Daily trade weighted
Jan Feb Mar Apr May Jun
US dollar index and
2020 daily S&P 500 index
return (Jan 2020–June
S&P 500 Index daily Return
2020)
Trade Weighted US dollar index

The virus-associated measures to protect public health have brought a sharp decline in
economic activity and a surge in job losses. In addition, weak demand and a significant drop
in oil prices pushed down inflation. In response to these COVID-19 outbreak repercussions,
the FOMC lowered the FFR total of 1.5% points to a range of 0% to 0.25% over two
meetings in early and mid-March. In connection with the changes in the FFR range, the
Federal Reserve reduced the interest paid on reserve balances and decreased the interest rate
offered on overnight reverse repurchase agreements (FED Monetary Policy Report, Feb.
2020). Accordingly, the economy’s standstill stance and increased uncertainty led investors
to rush to sell risky financial assets and purchase the US dollar considering it as a safe
haven asset. Hence, the US dollar appreciated in March and April amounting to 7%
appreciation against major global currencies since the beginning of 2020. Stock prices
plunged as concern over the COVID-19 outbreak grew and volatility surged to extreme
levels. The decline in stock prices was widespread across all sectors. The S&P500 index
declined by 13.4% in March, followed by a 7.6% decline in April (FED Reserve Bank of New
York Report, April 2020).
The FOMC maintained the FFR at its range of 0 to 0.25% throughout March until June to
achieve its maximum employment and price stability goals. In addition, the FED supported
a flow of credit in the economy through the creation of a number of emergency credit and
liquidity facilities and the enhancement of dollar liquidity swap lines (FED Monetary Policy
Report, June 2020). As a result of the FED easing monetary policy, the demand on the dollar
decreased where the USDX depreciated by 3.6% in the beginning of June and remained
stable until early July. While the volatility in S&P500 index decreased and the index started
to witness a moderate increase of 12% in the beginning of June, it later decreased by 0.7% in
the beginning of July.

4. Model and methodology

To determine the impact of COVID
19 cases in the USA, the FFR and the USDX on
S&P500 index, this study adopts the APT introduced by Ross (1976). APT is a multi-factor
asset pricing model in which asset returns are predicted using the linear relationship
between the assets’ expected returns and a number of macroeconomic variables that capture
systematic risk. A close look shows that high frequency financial variables time series
JCEFTS usually experience high volatility. This volatility exhibits heteroskedasticity that results in
14,1 inefficient least squares estimates. The most common model of heteroscedasticity used in
financial time series is the autoregressive conditional heteroskedasticity model (ARCH),
proposed by the Nobel laureate Robert Engle in 1982. The ARCH model involves a function
for the conditional variance of a time series that depends on the realized error of the previous
period. The model was extended by Bollerslev (1986) and Taylor (1986) to consider the
26 history of the variable’s own volatility, hence the name generalized autoregressive
conditional heteroskedasticity (GARCH) model. Afterward, MGARCH models were
introduced by using one dependent variable and more than one independent variable. In this
case, the current volatility of one time series is influenced not only by its own past residual
but also by past residuals to volatilities of other time series. Bollerslev et al. (1988) proposed
the basic framework for the MGARCH model by including additional parameters to capture
this effect, followed by Bollerslev (1990), who modeled this correlation indirectly between
the series instead of modeling the variance-covariance matrix directly. Bollerslev (1990) first
introduced a class of constant conditional correlation models in which a conditional
correlation matrix is assumed to be constant. Thus, the conditional co-variances are
proportional to the product of the corresponding conditional standard deviations,
guaranteeing the positive definiteness of the variance-covariance matrix, as it assumes that
the correlations are constant and time invariant.
Hence, this paper uses the MGARCH (p, q) model, where p is the number of ARCH terms
capturing the volatility from the period January 22 2020 until June 30 2020 measured as the
lag of the squared residual, while, q is the number of GARCH terms measuring the last
period’s forecast variance as a function of past residuals.

4.1 Data
4.1.1 Dependent variables. The dependent variables are the daily S&P500 index return and
the return indices of the 11 sectors constituents of S&P500 index, namely, communication
services, consumer discretionary consumer staples, energy, financials, health care, industrials,
materials, real estate, technology and utilities. The source of the data is the website of S&P
Dow Jones Indices www.spglobal.com/spdji/en/
4.1.2 Independent variables. The Logarithm of the daily USDX is used. The US dollar
index allows traders to monitor the value of the US dollar compared to a basket of select
currencies in a single transaction. For instance, an increase in the index suggests that the US
dollar has appreciated against the basket of currencies. The source of the data is the Federal
Reserve Economic Data https://fred.stlouisfed.org
The daily FFR is the interest rate at which depository institutions trade federal funds
(balances held at Federal Reserve Banks) with each other overnight. The FFR is the central
interest rate in the US financial market. It influences other interest rates such as the prime
rate, which is the rate banks charge their customers with higher credit ratings. Additionally,
the FFR indirectly influences longer-term interest rates such as mortgages, loans and
savings, all of which are very important to consumer wealth and confidence. The source of
the data is the Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DFF
The daily COVIDg reported cases in the USA. The source of data is https://github.com/
CSSEGISandData/COVID19/tree/master/csse_covid_19_data/csse_covid_19_daily_reports
John Hopkins University.
4.1.3 Period of time. The study starts with the first reported COVID-19 case on January
22 2020 up until June 30 2020. This period is divided into two sub periods. The first sub
period is January 22 until March 30 where uncertainty pertained in the USA about the
COVID-19 and the infection rate spiked ringing bells for lockdown. The second sub period is
April 1 until June 30 reflecting the lockdown, when airports, schools, universities and Impact of
business offices were in closure, many replaced by online work from home. COVID-19
4.2 The model
MGARCH (1, 1) model is used where the conditional mean and conditional variance are
specified as follows:
Mean equation:
27
0
Yt ¼ Xt u þ « t (1)

where Yt represents the dependent variables, Xt 0 represents the exogenous variables; USDX,
FFR and Covidg, while « t is the error term.
Variance equation:

s 2t ¼ v þ a« 2t
1 þ b s 2t
1 (2)

where s 2t is the one-period ahead forecast variance based on past information, that is, the
conditional variance; v is a constant term; « 2t
1 is the ARCH term measured as the lag of the
squared residual from the mean equation (equation 1) reflecting volatility from the previous
period and s 2t
1 is the GARCH term representing last period’s forecast variance.

4.3 Methodology
4.3.1 Preliminary tests.
4.3.1.1 Unit root test. A univariate analysis takes place for the variables used in the model
before MGARCH estimation. The Augmented Dickey Fuller (ADF) test is used to test for the
stationarity of the chosen variables under study (Dickey and Fuller, 1979). The null
hypothesis of the ADF test is unit root i.e. a non-stationary time series. If the absolute ADF
test statistic exceeds the absolute Mackinnon critical values, then the null hypothesis is
rejected indicating that the variable is exhibiting a stationary time series.
4.3.1.2 Arch effect test. A pre-test for the estimation of GARCH model is the ARCH effect
test, to examine the existence of clustering volatility in the residuals. Least squares
estimation of the mean equation (equation 1) is estimated, then Lagrange multiplier (LM)
test for ARCH effects proposed by Engle (1982) is applied on the residuals retrieved from the
least square estimation. The squared residuals are regressed on a constant and lagged
squared residuals up to order q. The null hypothesis of LM test is no ARCH effect. Engle’s
LM test statistic is Obs*R2 statistic is, computed as the number of observations times the R2
from the test regression.
4.3.2 Maximum likelihood estimation of multivariate generalized autoregressive conditional
heteroscedasticity. MGARCH (1, 1) model is estimated using maximum likelihood estimation,
where the contribution to the log-likelihood for observation t is as follows:

1 1 1 2
lt ¼
logð2p Þ
logs 2t
yt
Xt 0 u =s 2t (3)
2 2 2

The likelihood estimation of MGARCH is carried out to gauge the impact of the independent
variables on S&P 500 index daily return and each of the 11 constituent sectors of S&P 500
Index for the first sub period, second sub period and the whole time period of the study.
The mean equation 1 is estimated in which Yt is replaced with S&P 500 index return
regressed on the exogenous variables. The variance equation 2 is then estimated based on
JCEFTS the error term resulting from mean equation 1. A re-estimation of equations 1 and 2 while
14,1 replacing Yt with communication services index return takes place, followed by re-
estimating equations 1 and 2 by replacing Yt with consumer discretionary index return, etc.
By that, 12 replications for equations 1 and 2 are estimated separately for each S&P500
index sector for the first sub period as reflected in the results presented in Table 3. Then, 12
replications for equations 1 and 2 are estimated separately for each S&P500 index sector for
28 the second sub period as reflected in the results presented in Table 4. Further 12 replications
for equations 1 and 2 are estimated separately for each S&P500 index sector for the whole
period of study as reflected in the results presented in Table 5.
4.3.3 Robustness diagnostics tests. To ensure the robustness of the MGARCH model,
diagnostics tests are carried out including Engle’s (1982) LM statistic that is used to test the
null hypothesis of no ARCH effects. In addition to the Ljung and Box (1978) Q-test statistics
Q2 (p) to examine the null hypothesis of no autocorrelation in the squared standardized
residuals, up to a specific lag. If the GARCH model is specified correctly, then the estimated
standardized residuals should behave like white noise, that is, they should not display serial
correlation, conditional heteroscedasticity or any other type of nonlinear dependence.

5. Empirical results
5.1 Augmented Dickey Fuller unit root test
Table 1 shows the ADF unit root test results. S&P500 index return, the 11 constituent sectors
and FFR are stationary series I(0), while USDX and Covidg are first order homogenous, I(1).
Hence, the I(1) series are first differenced before being incorporated in the GARCH model.

5.2 Lagrange multiplier arch test results

Table 2 represents the results of ARCH LM test for each of the estimated models; the model
related the S&P500 index returns and the three independent variables (USDX, FFR and

Level First difference

MacKinnon (1996) MacKinnon (1996)
critical values at ADF critical values at
ADF test 5% significance test 5% significance Order of
Variables under study statistic level statistic level integration

S&P 500 index return
15.608
1.944
8.433
1.944 I(0)

Communication services sector
return
16.650
1.944
8.178
1.944 I(0)
Consumer discretionary sector
return
6.3180
1.944
14.152
1.944 I(0)
Consumer staples sector return
14.282
1.944
7.490
1.944 I(0)
Energy sector return
12.010
1.944
8.398
1.944 I(0)
Financial sector return
14.199
1.944
9.096
1.944 I(0)
Health care sector return
15.130
1.944
8.735
1.944 I(0)
Industrial sector return
6.3605
1.944
8.607
1.944 I(0)
Materials sector return
6.5451
1.944
8.013
1.944 I(0)
Real estate sector return
6.0302
1.944
8.217
1.944 I(0)
Technology sector return
17.336
1.944
7.207
1.944 I(0)
Utilities sector return
7.229
1.944
7.801
1.944 I(0)
Table 1.
USDX 0.908
1.944
9.266
1.944 I(1)
ADF Unit root test FFR
1.984
1.944
10.457
1.944 I(0)
results COVIDg
1.590
1.943
13.92
1.944 I(1)
Model Obs*R2 Prob. chi-square(1)
Impact of
COVID-19
S&P 500 index return 39.42361 (<0.001)
Communication services sector return 42.01693 (<0.001)
Consumer discretionary sector return 19.57027 (<0.001)
Consumer staples sector return 14.25925 (<0.001)
Energy sector return 5.786705 (0.0161)
Financial sector return 34.92264 (<0.001) 29
Health care sector return 24.91373 (<0.001)
Industrial sector return 20.48090 (<0.001)
Materials sector return 18.23517 (<0.001)
Real estate sector return 24.51272 (<0.001) Table 2.
Technology sector return 39.75244 (<0.001) ARCH LM test
Utilities sector return 9.694634 ( 0.0018) results

Covidg), in addition to the 11 models of the constituent sectors and their relation to the
independent variables. The chi-square probability is less than 5% for all of the estimated
models., which implies the rejection of the null hypothesis of “no ARCH effect” indicating,
the presence of ARCH effect and the suitability for using GARCH (1.1) model.

5.3 Maximum likelihood estimation of multivariate generalized autoregressive conditional

heteroscedasticity (1, 1)
This part addresses the results of MGARCH model that encompasses the mean equation, the
variance equation and the robustness diagnostic tests; which are reported in Tables 3-5 for
the first sub period, second sub period and the whole time period, respectively.
Beginning with the mean equation, results reveal a negative and significant relation
between Covidg and S&P 500 over the whole study period; yet Covidg shows a positive and
significant relation with S&P 500 during the second sub period. Sectors that were negatively
affected by the Covidg in the first sub period and the whole study period were
communications, consumer discretionary sector, consumer staples, health, IT and materials.
Yet, the sectors that reversed to become positively affected by Covidg in the second sub
period were communication, consumer discretionary, financial, industrial, IT and utilities.
Sectors that showed an insignificant relation with Covidg were energy and real estate
sectors.
Reasons behind this outcome may pertain to household consumption priorities shifting
toward basic needs during the pandemic-related times of uncertainty. This may be further
noticed on the automobiles sector and their components being the hardest hit by Covidg, a
direct consequence of manufacturing plants and dealership closures amidst social
distancing measures. During the second sub period, however, General Motors and Ford
started to change the nature of their production lines in which they produced medical
equipment, such as ventilators, masks and protective gear to combat the coronavirus
pandemic. Other industry groups facing similar pressures, although at a slightly lower level,
include consumer durables and apparel, as well as consumer services and the specialty retail
industry. Yet, the positive impact on the consumer discretionary sector is because of the
sharp increase in demand on e-commerce. Hence, Amazon and other pure-play e-commerce
retailers are benefitting from their online and e-commerce presence during social distancing
(World Economic Forum, 2020). Furthermore, the associated consequences of the lockdown
resulted in increased time spent indoors when households spent more money on home
entertainment such as Netflix. Consumer staples that encompass consumer products
 30
14,1

Table 3.

sub period
JCEFTS

MGARCH (1, 1)
Results for the first
Mean equation
COVIDg USDX FFR Constant
Sector Co-efficient (P-value) Co-efficient (P-value) Co-efficient (P-value) Co-efficient (P-value)

S&P index return
0.010 (0.023)**
391.19 (0.139)
0.401 (0.644) 0.674 (0.616)
Communication sector index return
0.00011 (0.003)***
1.08 (0.483)
0.00023 (0.982) 0.001 (0.914)
Consumer discretionary sector index return
0.009 (0.044)**
482.945 (0.032)** 0.12633 (0.888)
0.012 (0.993)
Consumer staples sector index return
0.008 (0.004)***
124.632 (0.497)
28.181 (0.799) 0.446 (0.797)
Energy sector index return
0.008 (0.222)
994.315 (0.07)* 0.649 (0.672) 1.049 (0.662)
Financial sector index return
0.007 (0.166)
443.457 (0.165)
0.257 (0.751) 0.503 (0.694)
Industrial sector index return
0.003 (0.552)
550.211 (0.034)**
0.527 (0.601) 0.719687 (0.626)
Health sector index return
0.009 (0.009)***
449.133 (0.021)**
0.507906 (0.494) 0.824961 (0.468)
Material sector index return
0.006 (0.068)*
395.001 (0.004)***
0.082 (0.884) 0.298 (0.735)
Technology sector index return
0.017 (0.005)***
294.821 (0.336)
0.299 (0.799) 0.575 (0.750)
Real estate sector index return
0.004 (0.336)
305.579 (0.287) 0.582 (0.744)
0.898 (0.746)
Utilities sector index return 0.002 (0.524)
296.394 (0.209) 0.089 (0.951) 0.104 (0.964)

Notes: *** Significant at 1%; ** Significant at 5%; *Significant at 10%

(continued)
 Variance equation Robustness diagnostic tests
C RESID(
1)^2 GARCH(
1) ARCH LM L jung box
Co-efficient Co-efficient Co-efficient Prob. Q2-stat
Sector (P-value) (P-value) (P-value) Adj.R2 Obs*R2 Chi Sq (1) (20) Prob.

S&P index return 0.151 0.461 0.76 (0.162) 0.451 (0.147) 0.075 0.238 0.626 17.961 0.995
Communication sector index return 0.000 (0.621) 0.688 (0.134) 0.476 (0.139) 0.043 0.079 0.777 20.094 0.452
Consumer discretionary sector index return 0.159 (0.500) 0.668 (0.218) 0.477 (0.203) 0.075 0.292 0.589 15.624 0.740
Consumer staples sector index return 0.112 (0.333) 0.682 (0.164) 0.508 (0.132) 0.055 0.169 0.681 16.625 0.677
Energy sector index return 0.510 (0.565) 0.8231 (0.004)*** 0.4801 (0.01)*** 0.153 0.239 0.625 12.978 0.878
Financial sector index return 0.112 (0.455) 1.08 (0.061)* 0.307 (0.165) 0.065 0.377 0.539 11.923 0.919
Industrial sector index return 0.253 (0.492) 0.692 (0.243) 0.506 (0.143) 0.126 0.130 0.718 11.451 0.934
Health sector index return 0.279 (0.166) 0.867 (0.127) 0.364 (0.139) 0.117 1.240 0.266 14.698 0.793
Material sector index return 0.024 (0.885) 1.864 (0.005)*** 0.182 (0.233) 0.064 0.332 0.564 9.8490 0.971
Technology sector index return 0.3462 (0.565) 0.598 (0.229) 0.522 (0.106) 0.037 0.915 0.339 22.519 0.127
Real estate sector index return 0.077 (0.576) 0.418 (0.204) 0.754 (0.004)*** 0.063 1.017 0.313 21.817 0.351
Utilities sector index return 0.065 (0.607) 0.712 (0.113) 0.550 (0.083)* 0.015 1.208 0.272 25.470 0.184

Table 3.
31
Impact of
COVID-19
 32
14,1

Table 4.

sub period
JCEFTS

MGARCH (1, 1)
Results for the first
Mean equation
COVIDg USDX FFR Constant
Sector Co-efficient (P-value) Co-efficient (P-value) Co-efficient (P-value) Co-efficient (P-value)

S&P index return 0.094 (<0.001)*** 571.788 (<0.001)*** 1.933 (0.329) 0.062 (0.818)
Communication sector index return 0.00075 (<0.001)***
4.739 (<0.001)***
0.012 (0.933) 0.002 (0.801)
Consumer discretionary sector index return 0.077 (0.007)***
601.613 (<0.001)***
9.032 (0.581) 0.983 (0.299)
Consumer staples sector index return 0.053 (0.1861)
351.838 (<0.001)*** 6.517 (0.461)
0.456 (0.396)
Energy sector index return 0.133 (0.425)
1336.711 (<0.001)***
22.83315 1.409 (0.483)
0.4578
Financial sector index return 0.136 (<0.001)***
1033.261 (<0.001)***
12.39 (0.021) 0.8 (<0.001)***
Industrial sector index return 0.089 (0.05)**
805.413 (<0.001)***
9.243416 (0.587) 0.686
0.5260
Health sector index return 0.037 (0.283)
295.932 (0.004)*** 3.551 (0.105)
0.134 (<0.001)***
Material sector index return 0.07 (0.113)
849.469 (<0.001)***
3.618 (0.761) 0.471
0.5068
Technology sector index return 0.116 (<0.001)***
507.671 (<0.001)*** 17.311 (0.092)
0.668
0.1317
Real estate sector index return 0.041 (0.437)
781.622 (<0.001)***
6.121 (0.176) 0.289 (<0.001)***
Utilities sector index return 0.084 (<0.001)***
577.188 (<0.001)***
4.013 (0.529) 0.164
0.7304

Note: ***Significant at 1%, **significant at 5%, *significant at 10%

(continued)
 Variance equation Robustness diagnostic tests
C RESID(
1)^2 GARCH(
1) ARCH LM L jung box
Co-efficient Co-efficient Co-efficient Obs * Prob. Q2-stat
Sector (P-value) (P-value) (P-value) Adj.R2 R2 chi Sq (1) (20) Prob.

S&P index return 0.083 (0.304)
0.162 (0.049)*** 1.127 (<0.001)*** 0.299 0.022 0.881 26.599 0.540
Communication sector index return 0.000 (0.004)***
0.182 (0.027)** 1.133 (<0.001)*** 0.256 0.294 0.588 39.574 0.072
Consumer discretionary sector index return 1.184 (0.042)**
0.106336 (<0.001)*** 0.559 (0.025)** 0.309 1.091 0.296 19.582 0.484
Consumer staples sector index return 0.086 (0.002)***
0.167 (0.017)** 1.106 (<0.001)*** 0.097 1.111 0.292 19.927 0.462
Energy sector index return 1.243 (0.409) 0.006 (0.950) 0.836 (<0.001)*** 0.342 3.385 0.066 13.286 0.865
Financial sector index return 0.235 (0.531)
0.164101 1.139 (<0.001)*** 0.333 0.373 0.541 24.026 0.241
0.0598
Industrial sector index return 0.160 (0.632)
0.139 (0.086)* 1.104 (<0.001)*** 0.332 1.025 0.311 17.598 0.614
Health sector index return 0.122 (0.066)
0.156 (0.015)** 1.098 (<0.001)*** 0.072 3.419 0.064 15.027 0.775
Material sector index return 0.186 (0.004)
0.126862 (<0.001)*** 1.07 (<0.001)*** 0.406 0.049 0.826 10.935 0.948
Technology sector index return 0.08 (0.458)
0.127 (0.037)** 1.096 (<0.001)*** 0.192 0.583 0.445 16.458 0.688
Real estate sector index return 0.101 (0.583)
0.122 (0.04)** 1.096 (<0.001)*** 0.237 1.686 0.194 9.3587 0.978
Utilities sector index return 0.039 (0.719)
0.123 (0.258) 1.093 (<0.001)*** 0.222 0.813 0.367 15.261 0.761

Table 4.
33
Impact of
COVID-19
 34
14,1

Table 5.
JCEFTS

time period
MGARCH (1, 1)
Results for the whole
Mean equation
COVIDg USDX FFR Constant
Sector Co-efficient (P-value) Co-efficient (P-value) Co-efficient (P-value) Co-efficient (P-value)

S&P index return
0.008 (0.016)**
564.687 (<0.001)***
0.054 (0.802) 0.159 (0.424)
Communication sector index return
0.0008 (0.035)**
4.478 (<0.001)***
0.0006 (0.804) 0.00055 (0.814)
Consumer discretionary sector index return
0.0082 (0.017)**
603.208 (<0.001)*** 0.055 (0.760) 0.108 (0.639)
Consumer staples sector index return
0.00506 (0.012)**
317.769 (<0.001)*** 0.097 (0.529)
0.079 (0.602)
Energy sector index return
0.0076 (0.240)
1323.306 (<0.001)***
0.272 (0.549) 0.215 (0.654)
Financial sector index return
0.0049 (0.180)
688.506 (<0.001)*** 0.017 (0.950) 0.037 (0.893)
Industrial sector index return
0.0013 (0.710)
802.046 (<0.001)***
0.0806 (0.784) 0.041 (0.881)
Health sector index return
0.007 (0.012)
335.139 (<0.001)***
0.0801 (0.745)
0.003 (0.990)
Material sector index return 0.0003 (0.926)
764.264 (<0.001)***
0.059 (0.849) 0.157 (0.545)
Technology sector index return
0.013 (0.004)
476.592 (<0.001)***
0.023 (0.919) 0.106 (0.657)
Real estate sector index return
0.002 (0.595)
711.439 (<0.001)*** 0.315 (0.244)
0.255 (0.309)
Utilities sector index return 0.0031 (0.252)
549.871 (<0.001)*** 0.347 (0.049)**
0.264 (0.165)

Note: ***Significant at 1%, **significant at 5%, *significant at 10%

(continued)
 Variance equation Robustness diagnostic tests
C RESID(
1)^2 GARCH(
1) ARCH LM L jung box
Co-efficient Co-efficient Co-efficient Obs * Prob. Q2-stat
Sector (P-value) (P-value) (P-value) Adj.R2 R2 chi Sq (1) (36) Prob.

S&P index return 0.289 (0.052)* 0.458 (0.034)** 0.566 (<0.001)*** 0.188 0.164 0.686 17.961 0.995
Communication sector index return 0.000 (0.05)** 0.321999 (0.031)** 0.620 (<0.001)*** 0.146 0.028 0.867 33.193 0.603
Consumer discretionary sector index return 0.1763 (0.088) 0.251552 (0.014)** 0.732 (<0.001)*** 0.177 0.021 0.883 16.458 0.998
Consumer staples sector index return 0.155 (0.105) 0.362 (0.016)** 0.635 (<0.001)*** 0.106 0.489 0.484 26.573 0.874
Energy sector index return 0.883 (0.301) 0.326 (0.0007)*** 0.675 (<0.001)*** 0.278 0.037 0.847 22.243 0.965
Financial sector index return 0.353 0.427 (0.009)*** 0.616 (<0.001)*** 0.208 0.015 0.903 29.930 0.752
0.305
Industrial sector index return 0.421 (0.138) 0.235 (0.028)** 0.721 (<0.001)*** 0.252 0.004 0.946 24.938 0.917
Health sector index return 0.378 (0.114) 0.252 (0.047)** 0.678 (<0.001)*** 0.136 0.123 0.726 12.703 1.000
Material sector index return 0.476 (0.023)** 0.367 (0.009)*** 0.623 (<0.001)*** 0.226 0.154 0.695 27.874 0.832
Technology sector index return 0.391 (0.144) 0.335 (0.035)** 0.642 (<0.001)*** 0.122 0.0004 0.997 27.006 0.861
Real estate sector index return 0.448 (0.083)* 0.343150 (0.007)*** 0.646 (<0.001)*** 0.202 0.149 0.699 20.515 0.982
Utilities sector index return 0.105 (0.418) 0.408557 (0.011)** 0.649 (<0.001)*** 0.142 0.620 0.431 26.193 0.885

Table 5.
35
Impact of
COVID-19
JCEFTS food and beverage companies have faced a significant reduction in consumption, as well
14,1 as disrupted supply chains. Although online consumption has increased, out-of-home
consumption – which historically generated the highest profits margin – has almost come to
a standstill (Leon, 2020).
The communications services sector is positively affected owing to the increasing
demand on the businesses’ entailing e-learning, video calls and video conferences (Casey and
36 Wigginton, 2020). Hence, its network usage skyrocketed. The technology sector may also be
negatively affected by the drop in the new launches of smartphones due to supply chain
constraints. Yet, the technology sector is benefiting from the increased demand on
specialized software that facilitates distant learning such as Microsoft teams and Zoom.
Similar results of positive impacts of COVIDg on the technology sector were reported by
Mazur et al. (2020), as well as found by Al-Awadhi et al. (2020) in the Chinese stock market.
Companies with remote working technology faced an increased demand on software that
enhanced their remote working capabilities. Moreover, the demand on cloud infrastructure
services increased notably (Salomi, 2020).
Experts believe that due to COVID-19, the healthcare industry experienced a short-term
positive impact on telehealth and virtual care, home health and medical devices. The
negative impact is predicted by health-care providers and services, companies running
clinical trials and drug companies reliant on the global supply chains (Holzapfel, 2020).
Companies in the industrial sector run three kinds of businesses, namely, manufacturing
and distribution of capital goods; provide commercial services and supplies and
transportation services. The positive impact of COVIDg on the industrial sector index return
in the second sub period may be because of some industries being deemed as essential and
were allowed to remain operating during the pandemic. For instance, industries related to
supplying intermediate goods to food processing and industries related to construction
(www.wlwt.com/article/what-are-essential-businesses-heres-what-will-remain-open-in-ohio/
31878972).
The financial sector consisting of commercial banks, insurance companies, consumer
lenders, investment firms and the like, exhibited resilience during the pandemic. The
economic crisis of 2008 exposed banks to crisis events like the COVID-19 pandemic and
improved the institution’s ability to manage risk and capital requirements.
The positive impact of COVIDg on the utilities sector is consistent with the results
reported by Mazur et al. (2020). Power, utilities and renewables companies continued to be
focused on keeping their assets online and provide safe, reliable supplies of electricity and
natural gas during the COVID-19 pandemic, though industrial demand dropped. Yet, this
was compensated by the surge in residential customer demand. Utilities are considered
households’ and firms’ necessities that are not expected to be affected by the pandemic.
Material sector of S&P include industries-related chemicals, construction materials,
mining, paper and forest products that were negatively affected by the drop in demand
during COVID-19 pandemic.
The USDX showed a negative significant effect on S&P 500 index returns and on the
return on each of its 11 constituent sectors over the second sub period and the whole period.
This negative relation conforms to the results of Granger et al. (1998) and Naresh et al.
(2018). While, the results contradict the results of Fang and Miller (2002), Dimitrova (2005)
and Do et al. (2015), who asserted a positive relation between the exchange rate and stock
market returns.
In fact, the USDX witnessed the same pattern during the past global financial crisis in
2008, yet the scale of the epidemic and the speed of its global spread makes the current
situation unique. Both crises witnessed similarities in terms of economic uncertainty
followed by a collapse; yet, differences are seen in the process and the speed of the spread Impact of
and the collapse. In 2007–2008, the endogenous financial shock affected the demand side COVID-19
first, and then turned into the Great Recession of 2009. On the other hand, the quick spread
of COVID-19 crisis all over the world given the highly integrated supply chains and the
physical contagion of the virus brought the world economy to a standstill with a sudden
supply shock. In turn, this supply-shock affected the financial sector on the demand side
(tourism, trade, etc.). The difference in the speed of both crises has also been exhibited in the
pattern of the US dollar, the appreciation of which prevailed in a slow process that took 37
months in its equivalence during the global financial crisis. During the current COVID-19
pandemic, a rapid surge in the US Dollar took place within two weeks. As producers’
constraint confines the consumers, a demand shock emerges everywhere, worsened by
psychological contagion that led investors to rush in selling financial assets and look for a
safe haven in the US dollar resulting in its appreciation and a decrease in stock returns.
The FFR showed a significant effect only in the second sub period, specifically, a
negative effect on the financial sector index return and a positive effect on the IT sector
index return. Nevertheless, FFR had a positive significant effect on the utilities sector index
return for the whole period under study. Industries characterized by heavy debt, are
therefore, highly sensitive to changes in interest rates. A decrease in FFR increases financial
sector index return, which is attributed to lower interest rates and lower costs in the
financial institutions as a whole because of decreasing savings rate and a reduction in the
amount of interest paid to savers. This negative relationship is in line with the real activity
theory that asserts a negative relationship between changes in the FFR and stock prices.
Real activity theorists posit a positive relationship between changes in the money supply
and stock prices (Cornell, 1983). On the other hand, a decrease in FFR decreases both IT and
utilities sectors indices return, supporting the expectation Keynesian hypothesis discussed
earlier.
Concerning the variance equation reported in the MGARH results, the RESID (
1) ^2 –
ARCH term- and GARCH (
1)-GARCH term – showed significance in most of the models.
The ARCH term is greater than GARCH term in first sub period models; it implies that the
volatility of S&P 500 index daily returns and its 11 constituent sectors are less affected by
the past volatility than the related news from the previous period. While the opposite took
place in the second sub period models and the whole period models in which the GARCH
term was greater than ARCH.
Regarding the reported robustness diagnostic tests, ARCH LM test results showed that
the chi-square probability is more than 5% for the entire reported MGARCH estimated
models, which implies the absence of the ARCH effect. In addition, the Ljung Box Q2-test
statistics emphasized the absence of serial correlation in the squared residuals as noted by
the insignificance of the Q2-statisitic.

6. Conclusion and policy implications

Inspite of all the damage, deep disasters such as pandemics, earthquakes and wars make it
difficult for policymakers to formulate solid policy responses. There are however, a range of
policy responses proposed on both the short and long term. In the short run, a critical role
needs to be played by governments, central banks and treasuries for the refunctioning of
disrupted economies. These authorities need to address multifaceted crises on the monetary,
fiscal and health fronts (McKibbin and Fernando, 2020). In the longer run, McKibbin and
Fernando (2020) propose policy responses that include collaborative global action, primarily
in public health and economic development. This collaboration is detrimental via increasing
international investments in public health development both in rich and poor countries alike,
JCEFTS enhancing previous scientific evidence on the role that public health plays in improving
14,1 quality of life and as a driver of economic growth (McKibbin and Fernando, 2020).
Specific policy actions on the financial front are also detrimental as the COVID-19 pandemic
continues to put strains on the financial system. Policies that help sustain the supply of credit to
the real economy and support financial intermediation are critical to ensure bank liquidity.
Concerns on the supply of credit to the real economy remain to be a major concern, as non-
38 financial corporates will face increasing shortages of funds as cash flows from operations
diminish. At the same time, tightening credit supply, especially in the nonbank sector, could
significantly add to funding strains in the corporate sector (FSB, 2020). Hence, fiscal measures
to increase liquidity on constraints need to be addressed. Further important policies on the
financial front to support the US financial market include measures by The Federal Reserve to
alleviate US dollar funding shortages; support market integrity; ensure continuous
transparency and sharing of information; continuously updating the assessments of the macro
financial implications in a rapidly evolving market environment.
As the shock to the financial market is far from uniform, crisis relief programs may be
addressed on the sectoral level. A number of at-risk sectors can be identified and maintained
via health protection and economic support on both the demand and supply sides. Resilient
sectors that are expected to reap future gains include the IT sector owing to the ongoing
discussions on the rising benefits of online teaching, working and purchasing online in the
US and worldwide. E-commerce is expected to reshape world demand and world markets.
Hence, encouraging investments in knowledge-led sectors and innovation is detrimental.
According to Flyvbjerg (2020), Covid-19 is an example of what is referred to as “the law
of regression to the tail,” which represents a situation with extreme events, where no matter
how extreme the event is, it will be followed by even more extreme outcomes (Flyvbjerg,
2020). The author argues, however, that Covid-19, was indeed predictable and early
mitigation was possible but leaders were slow in realizing the risks and sluggish in taking
preventive measures. Furthermore, the consequences of the pandemic were scaled up by
insufficient resources. Flyvbjerg (2020) leaves us with two lessons to be learned; there will
be more future pandemics following directly from the power-law distribution of pandemics
and the associated law of regression to the tail. Second, the need to handle the upcoming
pandemic by “cutting its tail,” and taking fast and large-scale precautionary measures that
include fast stimulus spending programs and safety nets (Flyvbjerg, 2020).
Based on available real-time financial data, the impact of the pandemic on US stock
markets (S&P 500) can be evaluated at the sectoral level with timeframe limitations owing to
the fast pace of the Covid-19’s break-out and peak that had coincided with the lockdown.
Future research may extend the time-frame of the study to gauge long-term impacts of the
pandemic on stock markets around the world, as more people are getting tested, hence,
improving on data accuracy and availability.

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Corresponding author
Rasha Hammam can be contacted at: rasha.hammam@miuegypt.edu.eg

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