Emerging markets' response to COVID-19: Insights from arbitrages strategies

Abstract

Global capital markets are sensitive to extreme and physical events. This research explores the influence of COVID-19 on cross-border arbitrage strategies in emerging markets. Specifically, this study develops a novel cross-market pairs trading strategy centered on healthcare stocks, tailored for the unique dynamics of the emerging market environment. The feasibility of cross-border arbitrage strategies in emerging markets is demonstrated by comparing the performance of the strategy before and after the outbreak. Additionally, sensitivity analysis of the risk preference factors before and after the COVID-19 outbreak further supports this argument. These findings offer valuable insights for international investors seeking arbitrage between emerging and other markets and, effectively responding to global shocks.

Keywords

• COVID-19
• Emerging markets
• Capital markets
• Market shocks
• Pairs trading strategy
• Cross-border investments