Global stock market network with India highlighted, representing volatility spillover during COVID-19.

Decoding Market Tremors: How COVID-19 Changed Investment Risk Between Global Markets and India

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Theo Raines in Business & Economy May 2025 • 4 min read.

"A Deep Dive into Volatility Spillover Effects and What They Mean for Your Portfolio"


The COVID-19 pandemic in 2020-2021 was more than just a health crisis; it was a seismic event for global financial markets. Understanding how interconnected markets transmit volatility, especially during times of crisis, is now more critical than ever for investors and policymakers alike. New research has uncovered key shifts in these dynamics between the world's leading economies (the G7) and India.

A recent study digs deep into the volatility spillover effects, examining how the pandemic altered the way risk is transmitted between these nations. By using sophisticated statistical models, the research highlights the changes in conditional correlations – a measure of how closely the markets move together – before and during the COVID-19 outbreak.

This analysis offers valuable insights for asset managers, foreign corporations, and financial regulators. By understanding these shifting volatility patterns, investors can make more informed decisions, implement effective hedging strategies, and better protect their interests against future market shocks. For regulators, this research provides critical tools for assessing systemic risk in an increasingly interconnected financial world.

What is Volatility Spillover? Understanding the Ripples in Global Markets

Global stock market network with India highlighted, representing volatility spillover during COVID-19.

Imagine a stone dropped into a calm lake. The impact creates ripples that spread across the entire surface. Similarly, in finance, “volatility spillover” refers to how market movements in one country can trigger fluctuations in others. If the U.S. stock market experiences a sharp downturn, it can send shockwaves across Europe and Asia, leading to similar declines.

These spillover effects are crucial because they reveal the interconnectedness of the global financial system. Investors need to understand these links to manage risk effectively. Policymakers need to be aware of them to prevent local crises from snowballing into global meltdowns.

  • Interconnectedness: Volatility spillover highlights how global markets are increasingly linked.
  • Risk Management: Investors use spillover analysis to hedge their portfolios against potential shocks.
  • Early Warning System: Policymakers monitor volatility spillover as an early indicator of systemic risk.
The recent study utilized two main statistical models to assess volatility spillover: Bivariate BEKK and t-DCC GARCH (1,1). These models allow researchers to quantify how volatility transmission between India and the G7 nations shifted before and during the pandemic. By analyzing daily stock market data, the study identified significant changes in market behavior.

The New Landscape of Risk: Key Takeaways and Future Implications

The research paints a clear picture: the pandemic fundamentally altered volatility spillover patterns. During COVID-19, the extent of volatility spillover changed significantly compared to the pre-COVID environment. The sharp increase in conditional correlation indicates a rise in systematic risk between countries. Understanding the changing spillover dynamics is critical for asset managers and foreign corporations. They can use this information to improve investment decisions and implement effective hedging measures to protect their interests. This research will also help financial regulators assess market risk in the future, especially in the wake of crises like COVID-19, to prevent wide scale economic catastrophe.

Everything You Need To Know

1

What is volatility spillover and why is it important?

Volatility spillover refers to the way market movements in one country can trigger fluctuations in others. For example, if the U.S. stock market experiences a sharp downturn, it can cause similar declines in other markets, such as those in Europe and Asia. This is crucial because it shows the interconnectedness of the global financial system.

2

Why is understanding the interconnectedness of global markets significant?

The interconnectedness of global markets is a key takeaway. Markets are increasingly linked, and the effects of financial events in one region can quickly spread to others. Investors and policymakers must understand these links to manage risk and prevent local crises from becoming global meltdowns. The research highlights how the COVID-19 pandemic fundamentally altered these patterns.

3

What statistical models were used in the research to assess volatility spillover?

The research utilized Bivariate BEKK and t-DCC GARCH (1,1) statistical models. These models were used to quantify how volatility transmission between India and the G7 nations shifted before and during the pandemic. By analyzing daily stock market data, the study identified significant changes in market behavior, helping to reveal the evolving risk dynamics.

4

How can the insights from this research be used by investors and regulators?

Understanding volatility spillover is critical for asset managers and foreign corporations to improve investment decisions. With this understanding, they can implement effective hedging measures to protect their interests. Financial regulators can use this research to assess market risk and prevent wide-scale economic catastrophe, particularly in the wake of crises like COVID-19.

5

How did the COVID-19 pandemic change volatility spillover patterns?

The pandemic significantly altered volatility spillover patterns, increasing systematic risk between countries. The sharp increase in conditional correlation indicates a rise in the interconnectedness between markets during the COVID-19 outbreak. This means that events in one market had a greater impact on others than before the pandemic. This understanding is crucial for informed decision-making in the face of future market shocks.

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