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PurposeThe paper examines the impact of COVID-19 on bank stock returns over various time scales and frequencies for 36 countries. Moreover, the authors look at the governments' responses to the corona crisis and examine its impact on bank stock returns.Design/methodology/approachThe paper applies continuous wavelet transformation to obtain robust estimates of the co-movement (coherency) between confirmed cases and bank stock returns over time and at different time scales. Furthermore, the authors apply fixed effects panel regression to examine the response of bank stocks to domestic COVID-19 policies.FindingsThe results indicate that the number of confirmed COVID-19 cases negatively impacts bank stock returns during different waves of the pandemic in the medium-run. However, there is only little dependence in the very short-run. Moreover, bank stock returns positively react to domestic COVID-19 polices. This demonstrates that governmental interventions not only reduce the spread of COVID-19 but are also able to thereby calm financial markets.Originality/valueThe application of wavelet methods to the field of economics and finance is relatively recent and allows the distinction between short-term and long-term effects. Standard econometric methods, in contrast, only operate within the time domain. This paper combines wavelet methods with conventional econometrics to answer the research question.

This study assesses the impact of policy uncertainty and the interest rate environment on the sovereign-bank nexus considering 48 banks in 14 countries. By applying principal component analysis to bank CDS premia in a country, the dynamic conditional correlation between sovereign CDS premia and the common variation underlying bank CDS is specified. Fixed effects panel regression analysis shows that the sovereign-bank correlation significantly increases in times of great policy uncertainty, low bank interest margins, high interbank market rates, and a low ratio of bank Tier 1 capital.

This paper examines the impact of policy uncertainty on the sovereign-bank nexus over various time-scales and frequencies. Considering Credit Default Swap premia from 32 banks in 10 countries, cross-wavelet analysis shows that sovereign default risk leads banking sector default risk in the short-run, while the relation reverses in the medium-run. Periods of high sovereign-bank dependence, moreover, coincide with periods of great political uncertainty. Applying partial wavelet coherency analysis, the sovereign-bank dependencies significantly weaken once the influence of Economic Policy Uncertainty is eliminated. This shows a tightening of the sovereign-bank nexus in times of great policy uncertainty.