The systematic risk of global asset returns in times of crisis: how is covid-19 different?
Dr. Yukun Liu
Assistant Professor of Finance, Simon Business School, University of Rochester
Using high-frequency data, we estimate and characterize the evolution of the factor structure of global asset returns across aggregate equity, fixed income and exchange rates over the period 2007-2020. We show how the factor structure of asset returns dramatically changes during crises compared to normal times, and describe common features of these crisis periods (e.g., Covid-19 pandemic, Global Financial Crisis, Brexit and Eurozone debt crisis). As an application, we identify how systematic factors become related to Covid-19 using news/shocks about the virus and epidemiological model forecast errors. We then investigate the implications of these findings for popular asset portfolios, with a particular focus on the volatility of these portfolios and their systematic risk exposure. Interestingly, the ability to diversify country asset-specific risk and hedge systematic risk is greatly reduced during the peak of Covid-19 news. These findings are common across crises.
