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

Theo Raines in Business & Economy July 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.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2208.09148,

Title: Understanding Volatility Spillover Relationship Among G7 Nations And India During Covid-19

Subject: econ.em

Authors: Avik Das, Devanjali Nandi Das

Published: 19-08-2022

Everything You Need To Know

What is Volatility Spillover and why is it important in global finance?

Volatility spillover describes the phenomenon where market fluctuations in one country impact others, much like ripples in a pond. This interconnectedness is vital for investors and policymakers. For investors, understanding volatility spillover enables effective risk management and hedging strategies. Policymakers use it as an early warning system to prevent local issues from escalating into global financial meltdowns. The COVID-19 pandemic highlighted the significance of volatility spillover by fundamentally changing how risk was transmitted between nations like India and the G7 countries.

How did the COVID-19 pandemic change the way financial risk is transmitted between the G7 nations and India?

The pandemic fundamentally altered volatility spillover patterns between the G7 nations and India. The research indicates a notable shift in conditional correlations during the COVID-19 outbreak, suggesting an increase in systematic risk between these economies. This means that market movements became more synchronized, and negative events in one market were more likely to be amplified across others. This change is significant for asset managers and foreign corporations in adjusting investment strategies and hedging practices.

What statistical models were used to assess volatility spillover effects, and how do they work?

The study utilized two main statistical models: Bivariate BEKK and t-DCC GARCH (1,1). These models are designed to quantify the transmission of volatility between markets. They analyze daily stock market data to measure how changes in one market affect the volatility of another. The Bivariate BEKK model helps assess the relationships between the volatility of two assets or markets. The t-DCC GARCH (1,1) model, with its conditional correlation element, quantifies the dynamic correlations between financial assets over time, which is crucial for understanding how volatility transmits during different periods, including crises.

Why is it important for asset managers to understand the shifts in volatility spillover during the COVID-19 pandemic?

Understanding shifts in volatility spillover, especially during crises like the COVID-19 pandemic, is crucial for asset managers to make informed investment decisions. By recognizing how market movements in the G7 nations and India have become more interconnected, asset managers can adjust their investment strategies. This includes implementing more effective hedging strategies to protect portfolios against potential shocks and to navigate the increased systematic risk. This allows them to better manage and mitigate risks associated with global market volatility.

How can financial regulators use the findings on volatility spillover to improve market stability?

Financial regulators can use the research findings to assess systemic risk and improve market stability. By understanding how volatility transmits between the G7 nations and India, regulators gain critical tools to monitor and manage potential crises. This allows for the implementation of proactive measures and policies aimed at preventing local issues from escalating into wider financial catastrophes. The insights from the study also provide a framework for assessing the interconnectedness of global markets, enabling regulators to develop strategies to mitigate risks and ensure the stability of the financial system, especially during and after crises like COVID-19.