Connectedness between Sectors: The Case of the Polish Stock Market before and during COVID-19

Abstract

This article studies the connectedness between economic sectors of the Polish stock market. The sectors that are considered are the following: banks, basic materials, chemicals, construction, developers, energy, food, and oil and gas. The analysis of the connectedness among sectors is conducted from a statistical and dynamic perspective. Using the time-varying parameter vector autoregression (TVP-VAR) method, the intensity, direction and variation of volatility spillover between the economic sectors are studied. Two samples are analysed, the first one being from 1 January 2013 to 12 December 2019, which corresponds to the period before the pandemic caused by COVID-19, and the second one being from 1 January 2020 to 2 December 2021, which corresponds to the period during the pandemic. A series of results are obtained. First, the connectedness between the economic sectors varies depends on the time. Second, the connectedness between the sectors was stronger during the crisis caused by the outbreak of COVID-19 rather than before the crisis. The volatility of each sector was also primarily due to their own volatility. Thirdly, the banking sector was the main sector with respect to volatility spillover. The results that are obtained are important for making the right decisions regarding financial stability under crisis circumstances, when considering development strategies for some economic sectors but also in portfolio management for performing diversification and risk-mitigation strategies.