Direct and spillover portfolio effects of COVID-19

This paper investigates the direct and spillover portfolio effects from the global outbreak of COVID-19. We find that an increase of the newly added cases of one specific country causes investors to significantly decrease their portfolio allocations in the outbreak countries (direct effect). Simultaneously, investors also decrease their allocations to other countries (spillover effect). In addition, we provide evidence and documentation that the transmission mechanism underlying foreign exposures matter to the above-mentioned portfolio effect. Moreover, we provide evidence for phase heterogeneity. The first wave of the COVID-19 pandemic has significant direct and spillover portfolio effects, but the impacts are weakened in second wave of the pandemic. The capital reallocation effect occurs only when the disease becomes global. Finally, our heterogeneities analysis shows that both local and spillover effects are mitigated when the economies are more developed and democratic and when the country has better health care facilities. [Display omitted] •This paper investigates the direct and spillover portfolio effects from the global outbreak of COVID-19.•The COVID-19 significantly decreases the portfolio allocations in both outbreak country and other countries.•The negative spillover effect brought by pandemic is more pronounced for countries with foreign exposures.•Compare with the first wave of the COVID-19, the portfolio effects of the second wave are weakened.•Better economics and health systems could mitigate the direct and spillover effects.