Financial Contagion of Russian Companies during the COVID-19 Pandemic

Abstract

The article examines the financial contagion of Russian companies during the pandemic COVID-19. Financial contagion refers to the strengthening of interconnections between segments of the financial market during a crisis, when turbulence from one market is transferred to others, and the relationship between parameters goes beyond normal market interactions. The study involved shares of 27 companies in the energy, financial, telecommunications, consumer and raw materials sectors of the Russian economy. As exogenous variables supposedly influencing the market values of these companies, we tested the rouble exchange rate against the US dollar, the spot price of Urals oil and the yield on annual government bonds (proxies for the cost of borrowings). Identification of the potential contagion period was based of the sliding coefficient
of variation of these variables. The construction of VARX models convincingly proved the increasing influence
of the exchange rate and the bond yield rate on the fundamental (market) return of Russian companies in the short term (during the acute phase of the pandemic) and the delayed impact of oil prices on it, which manifested itself during the chronic crisis. Contagion testing was also carried out on the basis of a change (growth) in the coefficient of determination in the acute phase of the pandemic as compared to the pre-crisis and post-crisis periods. For a more accurate assessment of the contribution of each variable to contagion, we used the method of source decomposition of the coefficient of determination with a correction for heteroscedasticity. This made it possible to identify the companies most vulnerable to
financial contagion during the pandemic, and the sources of their contagion, as well as the market segments that showed the greatest resilience. The study can be useful for managers in maintaining their companies’ market value, for investors in effective portfolio diversification, and for public authorities when pursuing a policy of financial stabilization in a crisis. The limitations of the study are related to the imperfections of the VARX models method, as well as to the specifics of the pandemic crisis, the conclusions from which can only be partially applied to other types of crises.