COVID-19 pandemic and financial innovations

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Authors

Salisu, Afees A.
Sikiru, Abdulsalam Abidemi
Omoke, Philip C.

Journal Title

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Publisher

Springer

Abstract

This study is motivated around the COVID-19 pandemic as a source of rising financial market risks. Hence, we investigate whether pandemic-induced risks can be hedged by alternative investment in financial innovations captured in exchange traded funds (ETFs). We explore the hedging effectiveness of sectoral ETFs along with a battery of robustness measures. Following the predictability analyses, we find that financial innovations captured in ETFs can effectively hedge both pandemic-induced and financially engineered market risks especially after controlling for the role of oil price in the predictive model. Our model provides better in-sample and out-of-sample forecasting accuracy and economic gains than the benchmark model and this is more pronounced for the COVID-19 pandemic period.

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Keywords

COVID-19 pandemic, Coronavirus disease 2019 (COVID-19), Pandemic, hedge, Financial innovation, Exchange traded funds (ETFs), Predictability

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Citation

Salisu, A.A., Sikiru, A.A. & Omoke, P.C. COVID-19 pandemic and financial innovations. Quality & Quantity 57, 3885–3904 (2023). https://doi.org/10.1007/s11135-022-01540-4.