The Impact of the COVID-19 Pandemic on Modelling Volatility and Risk Analysis of Returns in Selected European Financial Markets

COVID-19 pandemic had a significant impact on many areas of the economy, including financial markets. There is a question, if the European financial markets reacted in a similar way to the coronavirus news? Can pre-pandemic volatility and risk models still be used for return analysis in financial markets? The study attempts to assess the impact of COVID-19 pandemic on the volatility of returns of selected European stock markets, and thus on the level of extreme risk. We use models of conditional variance for selected heavy-tailed error distributions (skewed Student t, skewed GED, and alpha-stable). Risk analysis is performed using two quantile risk measures: VaR and Expected Shortfall. We compare the results for pre-pandemic and pandemic period. We found out that COVID-19 pandemic has a significant impact on the level of volatility and extreme risk in all analyzed countries.