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Variation in COVID-19 Cases and Future Asset Returns

October 4, 2021 • Posted in Animal Spirits

Does variation in the number of reported cases of COVID-19 predict near-term asset returns? To investigate, we look for a test acknowledging that the available sample is short and very noisy. Specifically:

  • To suppress noise, we use the 7-day moving average of U.S. COVID-19 cases.
  • To avoid measurement overlap, we calculate weekly changes in this average and compare these changes to next-week returns for SPDR S&P 500 Trust (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT).
  • To assess reliability of any relationship, we look at rolling 13-week correlations between weekly changes in COVID-19 data and next-week asset returns. While 13 weeks is a short measurement interval for noisy data, consistency in outputs would offer some confidence that there is a reliable relationship.

Using weekly (Friday) COVID-19 case data from the Centers for Disease Control (CDC) and weekly (Friday close) dividend-adjusted SPY and TLT levels during late January 2020 (limited by COVID-19 data) through mid-September 2021, we find that: (more…)

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