The Effects of the COVID-19 Crisis on Risk Factors and Option-Implied Expected Market Risk Premia: An International Perspective

Institutional investors often have to decide which strategy to use across international business cycles. This is especially important during economic and financial crises. The exogenous nature of the outbreak of the dramatic COVID-19 crisis represents a unique opportunity to understand the performance of risk factors during severe economic times across international stock markets. Even more important is to analyze how these factors behave across very different economic crises, such as the COVID-19 pandemic and the Great Recession. Although, the overall results show that the momentum and quality factors are the winners, with the value factor as the loser, this research also reports different responses of factors across crises and countries. The size, value, and defensive factors tend to perform worse during the health crisis relative to the Great Recession, while the momentum factor shows a poor performance during the financial crisis, but a positive one during the outbreak of COVID-19. The quality factor is an extraordinary defensive factor in both crises. Similarly, this paper reports heterogeneous responses of option-implied expected market risk premia across alternative stock market indices, and between the Great Recession and the COVID-19 crisis.

Assessing Behavior Similarity of Mineral Raw Material Prices through a Feature-Based Clustering Approach

Mineral raw materials prices have been shown to be affected by macroeconomic factors such as aggregate demand and commodity-specific factors (e.g., supply shocks). In addition, it has been shown that certain mineral raw material prices co-move, meaning that they behave similarly during expansion and contraction phases of the international business cycles. In order to assess the behavior similarity of the prices of different mineral raw materials, we propose a method that utilizes extracted features of time series price data and unsupervised learning techniques to create clusters of price movements having similar long-term behavior.

GLOBAL VS. GROUP-SPECIFIC BUSINESS CYCLES: THE IMPORTANCE OF DEFINING THE GROUPS

The literature on international business cycles has employed dynamic factor models (DFMs) to disentangle global from group-specific and national factors in countries’ macroeconomic aggregates. Therefore, the countries have simply been classified ex ante as belonging to the same region or the same level of development. This paper estimates a DFM for a sample of 106 countries and three variables (output, consumption, investment) over the period 1960–2014, in which the countries are classified according to the outcome of a cluster analysis. By comparing the results with those obtained by the previous grouping approaches, we show substantial deviations in the importance of global and group-specific factors. Remarkably, when the groups are defined properly, the “global business cycle” accounts for only a very small fraction of macroeconomic fluctuations, most evidently in the industrialized world. The group-specific factors, on the other hand, play a much greater role for national business cycles than previously thought—also in the pre-globalization period.