Do Economic Surprises Explain Returns of Stocks: The Case of COVID-19 Pandemic

This paper proposes a new measure of epidemic uncertainty combining three dimensions related to the SARS-CoV-2 disease ‒ (i) the total COVID-19 confirmed cases, (ii) the total COVID-19 confirmed deaths and (iii) the total COVID-19 recovered cases ‒ to show how financial and macroeconomic variables respond to epidemic risk. Using the cross-wavelet coherence, we investigate the relationship between the American and European stock markets and three measures of uncertainty (financial, economic, and epidemic) in the time-frequency domain. Our empirical analysis confirms the close out-of-phase link between financial uncertainty and markets, and suggests that the impact of the epidemic uncertainty, on both the U.S. and European stock markets, exhibit different patterns over time and across frequencies.