Examining the Effects of the COVID-19 Crisis, Financial Stress, and Oil Price Volatility on Stock Return Volatility of Pharmaceutical Companies During Recession and Expansion Periods

Abstract

The development of a financial stress index has been one of the most important policy priorities for developing countries prior to the occurrence of economic shocks. Uncertainty arising from financial stress, which has received increased attention in recent decades and is often considered one of its most significant costs, essentially refers to uncertainty regarding future levels of financial stress. The present study investigates the effects of the COVID-19 crisis, financial stress, and oil price volatility on stock return volatility of the entire group of pharmaceutical companies operating during recession and expansion periods over the time span from 1991 to 2024, using a time series approach. The Markov-switching method was employed to estimate the model across recessionary and expansionary regimes. From the perspective of purpose, the research is applied, and in terms of nature, it is descriptive-analytical and classified as an ex post facto study. Based on the estimation results of the Markov model, the coefficients are statistically significant at the 95% confidence level, and their signs are consistent with theoretical foundations. The intercept value in the first regime is 0.21, while in the second regime it is −0.39. The regime with a negative intercept represents a recession period, whereas the regime with a positive intercept indicates an expansion period. The variance of the disturbance terms in the first regime is 0.33 and in the second regime is 0.49. These findings indicate that the second regime (recession period) exhibits greater volatility compared to the first regime (expansion period). The estimated relationships reveal a positive impact of financial stress, the COVID-19 crisis, oil price shocks, and inflation rate on stock return volatility of pharmaceutical companies during recession periods. Additionally, a negative relationship between financial stress and stock return volatility during expansion periods is confirmed.