Portfolio diversification during the COVID-19 pandemic: Do vaccinations matter?

The COVID-19 vaccine rollout expects to mitigate the severe negative impacts of the pandemic on global financial markets. Our study provides supporting evidence for this expectation. We find robust evidence that vaccinations significantly reduce the cross-country stock volatility connectedness among G7 nations, suggesting that the diversification benefits of an international equity portfolio may be enhanced during the pandemic when vaccinations accelerate. We present two explanations for this result. First, the vaccine deployment improves stock market return and decreases individual stock market volatility. Second, the vaccine rollout helps a country’s stock market be more resilient to exogenous shocks. We further demonstrate that a global portfolio using a tactical allocation rule based on the intensity of vaccinations can outperform a buy-and-hold portfolio in terms of risk-adjusted returns. •We investigate impacts of vaccination on stock volatility connectedness.•Vaccination rollout significantly reduce the volatility connectedness.•We document two explanations for this reducing effect.•Vaccine rollout increases the resilience of a stock market to exogenous shocks.•Vaccine deployment lowers stock volatility and improves stock return.