Risk contagion of COVID-19 to oil prices: A Markov switching GARCH and PCA approach

Abstract

The COVID-19 pandemic and its impact on crude oil prices created additional risks throughout the financial industry. To contribute to the ongoing debates, this paper empirically examined the risk contagion of COVID-19 to oil prices by incorporating a Markov-Switching GARCH (MS-GARCH) framework and the multivariate GARCH time series model, BEKK-GARCH model. The study examines data collected between 27 January 2020 and 31 December 2020. Further, we used principal component analysis (PCA) to find principal factors explaining the overall variability of the global economic indicators that contribute to the risk. Finally, to support the risk transmission effects between COVID-19 and oil prices, we conducted regression analysis, while controlling for the factors extracted from the PCA method.

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This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. http://creativecommons.org/licenses/by/4.0/

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DOI

https://doi.org/10.1371/journal.pone.0312718

Repository URI

https://researchportal.hw.ac.uk/en/publications/3066f091-d4ce-47cd-9873-6ed847c1039b