Impacts of Covid-19 Pandemic and Persistence of Volatility in the Returns of the Brazilian Stock Exchange: An Application of the Markov Regime Switching GARCH (MRS-GARCH) Model

Abstract

This article provides a quantitative analysis using the Markov Regime Switching GARCH (MRS-GARCH) model with Gaussian distribution, in order to highlight the dynamics presented by Ibovespa during the period from September 2005 to September 2020, in which the subprime crisis occurred and the COVID-19 crisis started. In particular, it used two regimes (regime 1- low volatility and regime 2-high volatility) in the model so that the market parameters (Ibovespa) behave differently during economic crises with the regimes representative. The Ibovespa remained on regime 1 (low volatility) for three periods, totaling 176 months. In regime 2 (high volatility - 2008 and 2020 crises), it remained for about 5 months, that is, 3 months in the 2008 crisis and 2 months in the COVID-19 crisis. In addition, regime 1 is more persistent, that is, the probability of staying on this regime at a later period is approximately 98.27%, and that of switching to regime 2 is 48.25%. In regime 2, the probability of continuing this regime in the period t + 1 is 51.75%, while the probability of changing to regime 1 is 1.73.