key: cord-1045724-9ypzxbg2
authors: Tuna, Gülfen; Tuna, Vedat Ender
title: Are effects of COVID-19 pandemic on financial markets permanent or temporary? Evidence from gold, oil and stock markets
date: 2022-03-03
journal: Resour Policy
DOI: 10.1016/j.resourpol.2022.102637
sha: e257e33f30471002a0a3476d0a15ccacca24fdba
doc_id: 1045724
cord_uid: 9ypzxbg2

The purpose of this study is to examine the effect of COVID-19 pandemic on gold, oil, conventional and Islamic stock markets. Two variables as the number of new COVID-19 cases and Infectious Disease Equity Market Volatility (IDEMV) Index developed by Baker, Bloom, Davis and Kost (2019) are used in order to discuss the effect of COVID-19 pandemic. Other variables used in the research are oil prices, gold prices and S&P Dow Jones Index values for conventional and Islamic stock markets. The data set used in the study is the daily data set between 31st December 2019 and 5th May 2020 for all variables. Time and frequency domain causality test is used in the study. According to the study results, there is a permanent causality in long term between stock markets, gold and oil prices and the number of COVID-19 cases. There is also a permanent causality in long term between IDEMV and gold and oil prices. However, in short term, there is a temporary causality between gold and oil prices and the number of COVID-19 cases. These results are highly important especially for policy performers and portfolio managers to determine the portfolio strategies.

COVID-19 Pandemic has outcome in Wuhan, China for the first time in December 2019 and since then it has rapidly spread across the world and negatively influenced both social life and economic life. As a part of economic and social protection from COVID- 19 Pandemic, precautions such as lockdown, travel restriction among countries, stopping education, pause for full capacity work have been taken across the world. These precautions taken to decline the spreading speed of the pandemic have also led to stagnation in financial markets as in the real sector. It is estimated that financial markets will be more strongly affected by COVID-19

Pandemic than "1918 Influenza Outbreak" (Barro et al., 2020; Garrett, 2008) .

COVID-19 Pandemic as health crisis, which is a surprise outbreak of 2020, is a significant systematical risk resource for financial markets. Pandemics are important health crisis. The response of stock markets to pandemics was analyzed in the literature for severe acute respiratory syndrome (SARS) outbreak, (Chen et al., 2007; 2009) and Ebola virus disease (EVD) outbreak (Ichev and Marinč, 2018) . Today, we need more studies on the effects of the spread of COVID-19 Pandemic, a pandemic of 2020, on financial markets (Sharif et al., 2020) .

In the literature, the effect of COVID-19 Pandemic on financial markets pertains to either the relationship among investment tools or determining the feature of being a safe investment tool. This study is highly important for examining the long and short term temporary and permanent effect of the causality between gold, oil, Islamic and conventional stock markets with the COVID-19 Pandemic. Because it is impossible to evaluate the gold, oil and stock markets separately from each other. In addition to being an important investment tool, oil is a tool that affects the stock price of companies as a production input. Gold is both a hedging tool and a significant production input for some sectors. Therefore, the investors in financial markets always want to know the relationship between gold, oil and stock markets. Therefore, with this research, "Does the COVID-19 Pandemic have a long or short term, permanent or temporary effect on financial markets?" search for an answer to the question. This information obtained in this research will provide useful information for theorists and practitioners interested in financial markets in the processes of creating new strategies and information.

The Covid-19 Pandemic has affected the oil, gold and stock markets differently. For example; (Arouri and Nguyen, 2010; Jouini, 2013) . At this point, the change in oil prices emerges as a factor that affects both the energy input cost directly and the economic conditions that affect the cash flows of the enterprise indirectly. Therefore, oil prices can be an important factor affecting stock prices (Tuna et al., 2021a) . For this reason, it is thought that obtaining information about the relationship between oil prices and other investment instruments in the research will fill an important gap in the literature for both theorists and practitioners.

Stock markets are important systems that enable small investors to be included in financial markets. Additionally, the fact that stock markets are considered separately as conventional and Islamic is one of the most important features that differentiates it from the existing literature.

Because, Islamic stock markets are emerging as a rising value in financial markets around the world due to increasing demand. Islamic stock markets have emerged as an alternative to traditional markets (Ftiti and Hadhri, 2019) . According to Pew research center research, with the increasing Muslim population, Islamic financial markets can have a significant share in the world's financial markets. Additionally, approximately 23% of the world's population consists of Muslims. According to 2014 data, the growth rate of the Islamic Stock Market is around 15%-20%. Considering both the rapid growth in the Securities Markets and the population density; It is seen that Islamic Stock Markets will have an increasing importance in the future (Tuna, 2019) . Therefore, knowing the effect of COVID-19 Pandemic on conventional and Islamic financial markets is highly important for new strategy and knowledge generation processes of theoreticians and executes. Also, with this study, it is filled another gap in the literature in terms of evaluating how the COVID-19 pandemic affects Islamic and conventional stock markets in the long or short term as permanently or temporarily.

Gold is both a significant hedging tool in fluctuation period of the market and an effective diversification tool as always valid and reliable investment tool. The reason why gold is included in this study is to analyze how the price of this haven that investors shelter in all financial crisis has changed during the COVID-19 Pandemic. Another important point for the study is about the variables that can be used to evaluate the effects of COVID-19 Pandemic.

The investors in those markets use some economic and social indicators as estimator tools to protect from the uncertainty for the future. Variables such as currency rate, gold prices and economic growth commonly used as estimators in financial markets have begun to be different along with the COVID-19 pandemic. Because human beings who are the most important factor J o u r n a l P r e -p r o o f in financial markets are social creatures and they are affected very quickly from all kinds of event in the world. This leads the taken financial decisions to be influenced and changed.

Although the 2008 Global Financial Crisis affected the whole world economically, it only affected people's wealth; it did not lead them to worry about their health. However, COVID-19 Pandemic lead investors' wealth to decline due to economic problems and leads them to worry about their health due to the possibility of infection and disease. This cause the financial decisions of investors to be affected.

COVID-19 Pandemic, has caused vicious impact on the global economy (Shehzad et al., 2021b) . Unlike the health system crises experienced in the past, the volatility in the financial markets has increased a lot in the COVID-19 Pandemic (Baker et al., 2020 , Shehzad et al., 2021b . One of the most important reasons in this situation is the rapid flow of information to the financial markets. In this environment of high volatility, the estimation of financial asset prices becomes even more important for investors who want to make optimal portfolio choices.

At this point, it is important to estimate the prices of financial assets by using new estimators depending on the changing market conditions (Tuna, 2021b) . Whether the relationship between the COVID-19 Pandemic and financial markets is permanent or temporary is being analyzed in also this study by using time and frequency-domain causality analysis. This is a point that makes this study different. Because the studies examining the causality relationship between COVID-19 Pandemic and financial markets have been analyzed; however, no studies have been found on the existence of permanent or temporary causality in the literature. This study is a study investigating the causality between the COVID-19 Pandemic and gold, oil, conventional and Islamic stock markets in high and low frequencies. The causality is examined in this study unidirectional and separately from the number of new COVID-19 cases per day and IDEMV to gold, oil, conventional and Islamic stock markets. This is because the spread of COVID-19 Pandemic is unlikely to be affected by gold, oil and stock markets.

Because the spread of COVID-19 Pandemic entirely varies depending on obeying the taken precautions and rules. It is also important and different from the literature because it is the first study to use a new volatility index IDEMV, which can be used to evaluate the response of epidemic diseases to financial markets to evaluate the effect of the COVID-19 Pandemic. Also, the fact that this study is examined separately for conventional and Islamic stock markets is a feature , which makes the study original. This study, which will be one of the leading studies analyzing the relationship between COVID-19 Pandemic and financial markets, is different from the literature due to the reasons such as used variables, analyzed different financial markets such as Islamic stock markets and used time and frequency domain causality tests and aims to fill an important gap in the literature.

Accordingly, the study consists of 5 parts. After the introduction part, literatüre review in the second part, data and methodology are included in the third parts, and empirical findings are discussed in the fourth part. In the fifth part, evaluations are included according to the obtained findings. Pandemic on geopolitical risk is higher than the economic uncertainty of the USA and the risk of COVID-19 Pandemic is differently perceived in the short and long term. As this research shows, the risk arising from the Covid-19 Pandemic is perceived differently by investors and is reflected in portfolio investments differently. In this case, it also affects oil, stock and gold prices.

In the literature, some researchers analyzed the relationship between the COVID-19 Pandemic 

In traditional Granger (1969) causality test, on future-directed predicting one factor, it is tested if the second factor provides useful information. In Granger causality analyze, firstly, VAR model is taken as the basis, as equation 1. 

Geweke (1982) and Hosoya (1991) 

Basic statistical values belonging to the data set analyzed within the scope of the study are as in Table 1 .

J o u r n a l P r e -p r o o f J o u r n a l P r e -p r o o f According to ADF unit root test results in Table 2 , all variables contain unit root at level values.

It is seen that series become stationary when their first difference is taken. It is important to apply some diagnostic tests in order to reinforce the consistency of the results of the models used in the studies. The diagnostic tests used in this study are Breusch-Godfrey test, Breusch-Godfrey LM test and ARCH test. Breusch-Godfrey test and Breusch-Godfrey LM Test is used to find out autocorrelation in the error term of regression type models. The nonexistence of autocorrelation up to lag p is the null hypothesis in both versions of the Breusch-Godfrey test (Godil et al., 2022) . The diagnostic test results for the models in which the causality is examined in this study are as in Table 3 . Results of time-domain causality test performed for the variables analyzed within the study are as in Table 4 . As the number of COVID-19 cases and the resulting IDEMV index values in the study are considered as non-determinant for gold, oil and stock prices, causality analysis is discussed as separately and unidirectional way from the new COVID-19 cases per day and IDEMV index to gold, oil, conventional and Islamic stock markets. long term effect calculation. The optimal lag length was determined by Bayesian information criteria. The obtained results after analyzing the frequency domain causality test are as in Table   5 . pandemic and gold has increased its popularity as a safe investment tool against these decreases (Salisu et al. 2021a ). These obtained results can be appreciated that IDEMV index may provide useful information in long term for gold and oil prices but it may not provide for Islamic and conventional stock markets.

This study analyzes the long and short term effects of COVID pandemic.

• Gold, which is a safe haven for investors, is also an important financial tool which is affected by COVID-19 pandemic. COVID-19 pandemic whose permanent effects are observed on gold prices in long term and the variables for this pandemic can be used in the estimations for gold prices. 

Data available on request from the authors.

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• The purpose of study is to examine the effect of COVID-19 Pandemic on gold, oil and stock markets

There is a permanent causality in long term between stock markets, gold and oil prices and the number of COVID-19 cases

• There is also a permanent causality in long term between IDEMV and gold and oil prices