Abstract:
Purpose – The purpose of this paper is to investigate the effects of exchange rate volatility, oil price return
and COVID-19 cases on the stock market returns and volatility for selected emerging market economies.
Additionally, this study compares the market performance in the emerging economies during the COVID-19
pandemic with the pre-COVID and global financial crisis (GFC) period.
Design/methodology/approach – The authors apply the arbitrage pricing theory to model the riskreturn relationship between the risk-based factors (exchange rate volatility and COVID-19 cases) and stock
market returns. By applying the exponential generalized autoregressive conditional heteroskedasticity model,
the study captures the asymmetric volatility spillover from the stock markets to foreign exchange markets
and vice versa.
Findings – Findings reveal that exchange rate volatility exerts a negative and significant effect on the
market returns in Brazil (BOVESPA), Chile (S&P CLX IPSA), India (SENSEX), Mexico (S&P BMV IPC) and
Russia (MOEX) during the coronavirus pandemic. Regarding the effect of oil price returns, the authors find a
positive relationship between oil price and stock market returns across all the economies in the study. The
market returns of Russia, India, Brazil and Peru appeared more volatile during the pandemic than the GFC
period.
Practical implications – As the exchange rate volatility is causing higher risk and uncertainty in the
stock market’s performance, the central bank’s effort to maintain a stabilizing effect on the exchange rate sale
can be proven crucial for the economies under consideration. Emphasized should also be given to boost
investors’ confidence in the stock market, and for this, the government policy actions in reducing the
transmission of the disease are the need of the hour.
Originality/value – While a large volume of literature on stock market performance in times of COVID-19
has emerged from developed economies, this study adds to the literature by exploring the emerging
economies’ stock market performance during the COVID-19 pandemic. Unlike previous literature, this study
examines the volatility spillover between stock and exchange rate markets in the worst affected emerging
economies during the crisis.
