The Impact of the COVID-19 Pandemic on the Interconnectedness of Stocks in Bursa Malaysia

Abstract

Coronavirus (COVID-19) pandemic has a massive impact on economic growth and the stock market. Due to COVID-19’s high transmission rate, a movement control order (MCO) was enforced by the Malaysian government in four stages. Consequently, this situation has affected the stability and the relationship of stocks listed on Bursa Malaysia. Thus, this study is motivated to investigate and visualize a correlation of securities listed on FTSE Bursa Malaysia KLCI by employing a network analysis approach. The limitation of correlation analysis is that it only provides the strength and direction of the association, which is not visually shown in the graph. As a result, the network analysis technique is used to highlight the correlations between the stocks. The input of the network is based on the rate of return of each stock. The data is divided into two parts. The first duration is the period before implementation of MCO which is from 17th December 2019 to 17th March 2020. The second duration is during four stages of MCO which cover from 18th March 2020 to 3rd May 2020. There are changes in the interconnection between stocks in which seventeen stocks increased in the correlation measure during MCO. The importance of stocks is determined by applying centrality measures to disclose a topological structure of a network. This study finds that the stock with the highest connectivity based on the degree centrality before the MCO was unable to maintain the status as the central hub during the MCO. The results can assist the market participant to strategize the asset allocation to obtain well diversified portfolio selection.