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Impact of pandemics on financial markets

While there is limited prior literature on how epidemics, let alone pandemics, impact financial markets, imperfect parallels can be

drawn from other forms of natural disasters. Markets react to natural disaster such as earthquakes and volcanos; as well as air

disasters; and more recently acts of terrorism. While, for instance, the COVID-19 has been devastating to airline industry around the

world, with respect to air crash disasters, Bosch, Eckard, and Singal (1998) suggest some airlines, post air crashes, will benefit from

customers shifting airlines. This is unlikely to occur with COVID-19 which is depressing air travel globally amongst all airlines.

Certainly, COVID-19 will impact some industries more than others. But COVID-19 also will also enormously affect domestic demands

generally across almost every country.

The degree of overlap of other disasters providing insight into the potential impact of COVID-19 on the financial markets has

much to do with levels of spillover associated with other previous events. As COVID-19s impact will blanket the globe, it is useful to

compare the COVID-19 situation to past events that, although more localized, have led to spillovers that have established general

impacts. Research on the impact of terrorist events on the financial markets might provide some sort of parallel, as terrorist events,

while localized in their initial manifestation are by their nature designed to create a widespread change in public mood.

Karolyi (2006) discusses the spillover effects of terrorist attacks and whether research on this topic suggests a broad-based or

systematic contribution of potential terrorism to overall risk. His conclusion is that the evidence is quite limited, but there have

been few tests that have examined volatility or beta risks with asset-pricing models. Some papers suggest that the downturn in

markets with respect to terrorist events is rather mild, with downturns only very short (Brounen and Derwall, 2010). Choudhry

(2005) investigated, post September 11, a small number of US firms in a variety of different industries to see if this terrorist event

affected a shift in market betas, with mixed findings. Hon, Strauss, and Yong (2004) find that the September 11 terrorist attacks led to

an increase in correlations amongst global markets, with this effect varying by global region. A number of other papers present a

mixed picture of how much terrorist acts have spilled over into changes in the nature of financial markets (e.g., Chesney, Reshetar,

and Karaman, 2011; Choudhry, 2005; Corbet, Gurdgiev, and Meegan, 2018; Nikkinen and Vhmaa, 2010).4

COVID-19 is perhaps a unique outcome in terms of its global scope as a pandemic, at least since the influenza pandemic of 1918.

But, as discussed above, a disaster on the scale of COVID-19 was not an extremely unlikely possibility. It is interesting to compare the

COVID-19 outcome (thus far) to an imagined nuclear conflict. Nuclear conflict, unless one considers dubiously a very localized

impact, is not survivable by anyone on Earth. Consequently, a threat of nuclear war, apart from signaling economically impacting

international tensions, is widely seen as having almost no impact on market prices. The reason seems to be not because of its low

probability, but because in the event of a non-survivable event other outcomes are irrelevant.

According to Epstein (2019) (following US Social Security Administration data), the probability of a 35 year-old man in the US

dying within the next year is under 0.2%. For a 35-year-old woman, chances are about 0.1%. These probabilities increase only very

gradually with age. Even a 50-year old man runs a mere 0.5% risk, a 50-year old woman just 0.3%. In comparison, what are the odds

that there might be a global nuclear conflagration in the next year? The answer might be that we don't have enough data to form such

an estimation. Nuclear wars, seen as probability tail events, are seen as not survivable by most people. In other words, the answer to a

question of how will nuclear war affect my 401k?, is that it doesn't matter because, absent life on earth, a defined contribution plan

has no utility. COVID-19 on the other hand is creating economic destruction on an unprecedented scale (witness the $2.2 trillion

bailout package in the US versus the $750 billion package during the global financial crisis). But, unlike global nuclear conflict,

COVID-19 is survivable and the value of financial markets will remain extremely relevant. It seems very likely that the next time there

is a sudden appearance of a contagious respiratory illness, there will concomitantly be a substantial global financial market reaction.

Certainly COVID-19 will shape future investigations of tail risk and financial markets

Impact of COVID-19 on banking and insurance

Banks of course by their nature are vulnerable in times of economic downturns, because of the likelihood of nonperforming loans

and the possibility in extreme cases of bank runs. To this point, Leoni (2013) find the spread of HIV in developing countries is

associated with large increases in deposit turnover. They attribute this to the need to pay for individual treatments forcing largescale

withdrawals of deposits.

Lagoarde-Segot and Leoni (2013) develop a theoretical model that shows that the likelihood of a collapse of the banking industry

of a developing country increases, as the joint prevalence of large pandemics increases. Much of the group lending of microfinance

institutions and banks lending to the poor will be pressured during epidemics because all members of the group will be pressured by

the aggregate shock (Skoufias, 2003). Rural financial institutions will be subject to bank runs during floods or crop failures

(Binswanger and Rosenzweig, 1986). It remains to be seen how COVID-19 will change the practices of financial institutions.

More generally, how long will banks, all around the world, maintain a more conservative lending policy post COVID-19? Have

there been studies on bank reactions to macroeconomic shocks (Bongini et al., 2019) that are of the magnitude of COVID-19?

Literature has considered whether black swans have a global impact (Wang et al., 2019). But COVID-19 is a globally impacting

phenomenon. There is also the question of whether events of the magnitude of COVID-19 are insurable. Another question is whether

COVID-19 should be regarded as a black swan, or an unforeseeable event with extreme consequences? The answer seems to be no.

When you have a host of academic articles, discussed above, suggesting the possibility of pandemics and predicting enormous

economic losses as a result of pandemics; as well as numerous real-world epidemics and health crises that could have become global

pandemics, it should be regarded as something other than totally unexpected.

Clearly pandemics such as COVID-19 are foreseeable; and so it is highly beneficial such events are insurable. Tamura and

Sawada (2009) discuss the possibility of such insurance in the context of avian flu epidemics in Vietnam. Of course, such insurance, at

least at the private level, is generally only available to those that are financially included. The bottom of the pyramid will be likely left

out. Sawada and Shimizutani (2008) note that in the aftermath of severe crises, those with personal collateral readily recover

financially, while those without means of collateral do not.

WPS Office PBBAF404 TAKE ...04daaed4d.pdf Q X W money and capital management Q X + 2 Ezin E... Go Premium = Menu w Home Insert Comment Edit Page Protect Tools Click to search 0 U Hand Tool 125% Fit Width 3 /7 Page Select Tool PDF to Word PDF to Picture Play Slide Zoom Out Zoom In Actual Size Fit Size Clockwise Anticlockwise Rotate Previous Next Page Continuous readi ii. K You are required to provide an independent assessment of the potential impact of the Coronavirus on three types of financial institutions in Ghana; Universal Banks, Insurance and Pensions Companies, and Finance Companies. Your assessment should first simply classify the exposure of the three types of financial institutions (Universal Banks, Insurance and Pensions Companies, and Finance Companies) in Ghana to five different types of risks; liquidity risk, credit risk, interest rate risk, market risk and exchange rate risk as Low, Moderate or High. For each of the three financial institutions (Universal Banks, Insurance and Pension Funds, and Finance Companies) you are to fill out the table below. (Three tables are required. One for the assessment of each institution). Universal Banks Low Moderate High 1. Liquidity Risk E 2. Credit Risk 3. Interest Rate Risk 4. Interest Rate Risk 5. Exchange Rate Risk 3 /7 Page O OD 1=1 125% + 6 WPS Office PBBAF404 TAKE ...04daaed4d.pdf Q X + W money and capital management 2 Ezin E... Go Premium = Menu w Home Insert Comment Edit Page Protect Tools Q Click to search 0 Hand Tool Fit Width 75% o 3 /7 Page Select Tool PDF to Word PDF to Picture Play Slide Zoom Out Zoom In Actual Size Fit Size Clockwise Anticlockwise Rotate Previous Next Page Continuous readi Insurance and Pensions Funds Low Moderate High 1. Liquidity Risk 2. Credit Risk 3. Interest Rate Risk 4. Interest Rate Risk 5. Exchange Rate Risk Finance Companies Low Moderate High B 1. Liquidity Risk 2. Credit Risk 3. Interest Rate Risk 4. Interest Rate Risk 5. Exchange Rate Risk (5 marks) For every institutional assessment you provided in (ii) you are to give reasons for the assessment. Each reason or explanation should not exceed 400 words. (12 marks) ED DO 3 17 Page 1=1 75% + 2 WPS Office PBBAF404 TAKE ...04daaed4d.pdf Q X W money and capital management Q X + 2 Ezin E... Go Premium = Menu w Home Insert Comment Edit Page Protect Tools Click to search 0 U Hand Tool 125% Fit Width 3 /7 Page Select Tool PDF to Word PDF to Picture Play Slide Zoom Out Zoom In Actual Size Fit Size Clockwise Anticlockwise Rotate Previous Next Page Continuous readi ii. K You are required to provide an independent assessment of the potential impact of the Coronavirus on three types of financial institutions in Ghana; Universal Banks, Insurance and Pensions Companies, and Finance Companies. Your assessment should first simply classify the exposure of the three types of financial institutions (Universal Banks, Insurance and Pensions Companies, and Finance Companies) in Ghana to five different types of risks; liquidity risk, credit risk, interest rate risk, market risk and exchange rate risk as Low, Moderate or High. For each of the three financial institutions (Universal Banks, Insurance and Pension Funds, and Finance Companies) you are to fill out the table below. (Three tables are required. One for the assessment of each institution). Universal Banks Low Moderate High 1. Liquidity Risk E 2. Credit Risk 3. Interest Rate Risk 4. Interest Rate Risk 5. Exchange Rate Risk 3 /7 Page O OD 1=1 125% + 6 WPS Office PBBAF404 TAKE ...04daaed4d.pdf Q X + W money and capital management 2 Ezin E... Go Premium = Menu w Home Insert Comment Edit Page Protect Tools Q Click to search 0 Hand Tool Fit Width 75% o 3 /7 Page Select Tool PDF to Word PDF to Picture Play Slide Zoom Out Zoom In Actual Size Fit Size Clockwise Anticlockwise Rotate Previous Next Page Continuous readi Insurance and Pensions Funds Low Moderate High 1. Liquidity Risk 2. Credit Risk 3. Interest Rate Risk 4. Interest Rate Risk 5. Exchange Rate Risk Finance Companies Low Moderate High B 1. Liquidity Risk 2. Credit Risk 3. Interest Rate Risk 4. Interest Rate Risk 5. Exchange Rate Risk (5 marks) For every institutional assessment you provided in (ii) you are to give reasons for the assessment. Each reason or explanation should not exceed 400 words. (12 marks) ED DO 3 17 Page 1=1 75% + 2