Covid-19, the novel coronavirus, has been a source of anxiety for markets and individuals around the world since its outbreak in December 2019. Many traders have been looking for ways to use the information on the spread of the virus to predict market movements. While there are indicators that can be used for this purpose, one approach is to use the number of confirmed cases as a sentiment indicator.
In Reference [1], the authors established an intraday algorithmic trading system that would open a short position in the Eurostoxx 50 futures market if the number of new confirmed cases of Covid-19 increased in the previous day (suggesting that fear of the epidemic rises), and close by afternoon. The system will open a long position if the new confirmed cases of Covid-19 have decreased the previous day. The trading system achieved an annual return of 423% and a Sharpe ratio of 4.74.
The methodology followed in this study has been based on the development of an intraday algorithmic trading system that operated short and long depending on the increase or decrease in confirmed cases in Europe published the previous day. The financial instrument chosen for this study was the future of the Eurostoxx.
The main contributions that could be highlighted from this study are:
- The number of confirmed cases of new Covid-19 infections is a representative metric of the evolution of the epidemic and therefore of the fear that this implies on health, the economy and financial markets.
- This metric has predictive capacity on the evolution of financial markets. Therefore, an algorithmic trading system that goes short (long) if there is an increase (decrease) in confirmed cases is a profitable system, in contexts of maximum uncertainty.
The article presented new evidence that emotions have an impact on financial markets, especially in situations of extreme uncertainty. In these situations, investors may utilize a variety of investment techniques based on metrics reflecting the progression of fear. Besides traditional sentiment indicators such as the volatility index, VIX, the number of confirmed Covid cases proved to be a reliable one during the pandemic.
References
[1] Gómez Martínez, R., Prado Román, C., & Cachón Rodríguez , G. (2021). Algorithmic trading based on the fear of Covid-19 in Europe. Harvard Deusto Business Research, 10(2), 295-304. https://doi.org/10.48132/hdbr.326
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