How did COVID-19 affect market volatility across emerging economies?

Emerging economies faced sharp financial turbulence during the COVID-19 pandemic as global shocks and policy responses sent volatility surging across markets. Among these, South Africa recorded the highest levels of market instability relative to its BRIC counterparts, with spillover effects from the United States compounding domestic risks.

A recent empirical investigation provides a critical look at how the country's financial markets responded to U.S.-driven volatility and economic policy uncertainty (EPU) during the pandemic. The study, titled “Analysing Market Volatility and Economic Policy Uncertainty of South Africa with BRIC and the USA During COVID-19” and published in the Journal of Risk and Financial Management, offers a comparative lens on how South Africa, the BRIC nations (Brazil, Russia, India, China), and the United States weathered market shocks. Through sophisticated econometric modeling, the researchers assess volatility spillovers, market interconnectedness, and the causal influence of policy uncertainty on equity returns.

How did COVID-19 affect market volatility across emerging economies?

The pandemic triggered widespread volatility, but the extent varied significantly by region. Using daily return data from January 2020 to March 2022, the study finds that South Africa and China experienced the highest levels of market turbulence during the COVID-19 period. This reflects not only their exposure to global supply chains and investor sentiment but also domestic economic fragility amid lockdowns and policy shifts.

To quantify volatility, the authors employed the GARCH-in-Mean model, which revealed a direct and positive relationship between volatility and market risk premiums. That is, as uncertainty and risk perception increased, so did investor demand for higher returns—underscoring the heightened sensitivity of South African and Chinese markets. Among the BRIC countries, Brazil and Russia exhibited moderate volatility, while India demonstrated relatively contained fluctuations.

This market behavior reflects broader macroeconomic trends. South Africa's dependence on commodity exports, coupled with pre-existing fiscal vulnerabilities, amplified its exposure to global financial tremors. Meanwhile, China’s earlier emergence from lockdowns provided only a partial shield against investor nervousness, especially as geopolitical tensions resurfaced alongside pandemic-related concerns.

Are U.S. market shocks transmitted to emerging economies?

The study examines volatility spillovers using the BEKK-GARCH model, a tool capable of capturing bidirectional risk flows. Findings indicate that South Africa was the most sensitive emerging market to shocks originating from the United States. This points to the high level of financial interdependence and capital mobility between the two economies, despite structural differences.

While all BRIC countries showed some level of responsiveness to U.S. market movements, the magnitude and persistence of the spillover effects were not uniform. India and Brazil demonstrated noticeable but less persistent spillovers, while Russia exhibited a more insulated pattern, likely due to a combination of capital controls and less integration with U.S. financial systems.

Importantly, these findings signal that U.S. financial stability plays a systemic role in shaping global market dynamics, especially during crises. For emerging economies like South Africa, such volatility linkages imply that external policy decisions, such as U.S. stimulus rollouts or interest rate changes, can have immediate repercussions, regardless of local fundamentals.

The researchers emphasize that this interdependence exposes South Africa to contagion risks during future global events. Managing this vulnerability will require enhanced macroprudential frameworks, diversified trade partnerships, and resilient capital market infrastructure capable of absorbing sudden shocks.

What role does economic policy uncertainty play in shaping returns?

The study further delves into the relationship between Economic Policy Uncertainty and equity market performance. By applying Granger causality analysis, the authors uncover that policy uncertainty acts as a leading indicator for market movement in several emerging markets.

Most notably, Brazil and India emerged as highly sensitive to EPU fluctuations. In both cases, the causality flowed from EPU to stock returns, suggesting that as uncertainty about government policy increases, investor confidence and market returns diminish. This is particularly salient during pandemics, where health policies, stimulus programs, and monetary actions remain unpredictable and heavily scrutinized by market participants.

South Africa, while less impacted than Brazil and India in this regard, still exhibited notable behavioral patterns tied to EPU. The country’s policy shifts, ranging from interest rate cuts to fiscal packages, were closely followed by equity market reactions, albeit less systematically than in other BRIC nations. China's policy-driven economy showed relative insulation from EPU, consistent with its centralized governance and tighter control over financial communication.

The research emphasizes that transparent, predictable, and timely policy communication can mitigate the adverse effects of uncertainty. For emerging markets grappling with volatility, ensuring clear fiscal and monetary signaling becomes an essential part of market stabilization.