Government response stringency index: an alternative for the volatility determining during pandemics

Abstract

The spread of the COVID-19 virus on all continents has caused a rapid evolution of the volatility of stock indices. To prevent and counteract the effects of this global event, researchers have tried to identify the causes, amplitude, and persistence of volatility. To measure volatility using statistical models, most authors chose the number of illnesses or deaths caused by the COVID-19 virus. However, the method of recording and reporting the number of illnesses and deaths by each state, assumed certain shortcomings reported in the literature. As an alternative, Hale et al. (2021, p. 8) proposed the Government Response Stringency Index (SI). The research proposes the determination of volatility with GARCH and VAR methods using the SI index as a variable. For this purpose, 28 countries from all continents were considered. The analysis period was March 19, 2020 to December 31, 2021. The main findings are: 1) the determination of volatility for 28 analysed countries; 2) some countries show better adaptability to the pandemic; 3) the differences between the volatility calculated with the SI index and the number of illnesses or deaths are small; 4) the links between the markets are stronger in the postcrisis period. Based on these results, comparative analyzes can be carried out between states, geographical areas and continents. Furthermore, the results allow us to appreciate other major events that affected the world capital market.