Examining the Dynamic Asset Market Linkages under the COVID-19 Global Pandemic

TL;DR

This paper investigates how the COVID-19 pandemic affected global asset market linkages and efficiency, revealing that efficiency fluctuated significantly, was temporarily improved during the pandemic, but declined again due to the Bitcoin bubble.

Contribution

It applies a time-varying vector autoregression model to measure dynamic market efficiency changes during COVID-19, highlighting the pandemic's impact on asset market linkages.

Findings

Market efficiency varied widely over time.

COVID-19 temporarily enhanced market linkages.

Market efficiency declined due to the Bitcoin bubble.

Abstract

This study examines the dynamic asset market linkages under the COVID-19 global pandemic based on market efficiency, in the sense of Fama (1970). Particularly, we estimate the joint degree of market efficiency by applying Ito et al.'s (2014; 2017) Generalized Least Squares-based time-varying vector autoregression model. The empirical results show that (1) the joint degree of market efficiency changes widely over time, as shown in Lo's (2004) adaptive market hypothesis, (2) the COVID-19 pandemic may eliminate arbitrage and improve market efficiency through enhanced linkages between the asset markets; and (3) the market efficiency has continued to decline due to the Bitcoin bubble that emerged at the end of 2020.