The impacts of the coronavirus on the global economy: Part IV

Between March 20 and March 27, the global financial turbulence score dropped from 9.4 to 8, which represents a 14.3% decrease. At the same time, the implied volatility index, VIX, also fell from 65.54 to 57.08 (a 12.9% decrease). This means that stock markets across the globe have actually become less volatile and investors have started fearing less about the future. The major stock markets, except Bombay Stock Exchange, are recovering. Could this mean the global financial crisis caused by the outbreak of the COVID-19 is nearing an end? i do not think so and here are the reasons.

First, the levels of the global financial turbulence score and the VIX are still high. As it appears in Figure 1, they are above the red horizontal lines, which represent their expected values during high volatility periods. These expected values are respectively 3.4 and 27.8. Second, most benchmark indices are still, at least, 14% below their levels of February 14, 2020. For example, on May 27, the New York Stock Exchange (NYSE) composite index was 29.3% below its level of February 14, the Next 150 index was 31.6% below, and the Bovespa Index was 38.8% below. Third, stopping the spread of the COVID-19 has necessitated inducing a recession by closing borders and some businesses, which government are not yet ready to reopen.

Figure 1: Global Financial Turbulence Scores and VIX, Jan 8, 2000 - Mar 28, 2020

Are there signs of flight to safety?

Quite often, high uncertainty in financial markets leads investors seeking less risk to prefer government bonds to stocks. The move of investment funds out of stocks into bonds that follows is referred to as flight-to-safety. The current financial crisis has not triggered any flight to safety from stocks to bonds. The reason is that both bond yields and stock prices have been falling. The 13-week treasury bill rate went down from 1.54% on February 14 to .06% on April 2. In these conditions, acquiring bonds does not appear to be a safer alternative investment opportunity.

Figure 2: NYSE Composite Index and the 13-Week Treasury Bill Rate, Feb 14, 2020 - April 2, 2020

Dataset and Code

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The Latest Global Financial Turbulence Scores.

Date	Score
Feb 14, 2020	1.36
Feb 21, 2020	6.23
Feb 28, 2020	3.68
Mar 6, 2020	9.74
Mar 13, 2020	12.89
Mar 20, 2020	9.37
Mar 27, 2020	8.03

The components indices of the global financial turbulence score

(1) NYA: the New York Stock Exchange composite index, (2) IXIC: the NASDAQ composite, (3) N225, the Tokyo Stock Exchange average index, (4) FTAS, the London Stock Exchange FTSE all share, (5) HSI, the Hong Kong Stock Exchange index, (6) N150, the Euronext Next 150 index, (7) GSPTSE, the Toronto Stock Exchange composite index, (8) BSESN, the Bombay Stock Exchange sensitive index, (9) GDAXI, the Frankfurt Stock Exchange performance index, (10) AXJO, the Australian Securities Exchange S&P 200, (11) SSMI, the SIX Swiss exchange mid-cap index, and (12) IBOVESPA, the Brazil Stock Exchange index.

Formula

$$d_t² = (r_t - μ ) Σ ^-1 (r_t - μ )',

where $d$ denotes the turbulence score, the vector $r$_t lists the current growth rates of the benchmark indices, the vector $$ μ their historical averages, and $$ Σ designates their variance-covariance matrix. For further details, see Mark Kritzman and Li Yuanzhen (2010).