COVID-19 Pandemic and Stock Market Response: The Role of COVID-induced Fear, Investor Attention, and Firm-specific Characteristics
Main Article Content
Abstract
The study examines the reaction of S&P BSE 500 companies to the outbreak of the 2019 novel coronavirus (COVID-19). The impact of COVID-19 induced fear of volatility index (VIX) on stock market returns and the role of pre-pandemic firm-specific characteristics in intensifying/reducing the effect of fear on stock returns are analysed. Event study methodology and panel data approach with firm and industry-time fixed effects are employed. The results show fear of VIX plays a significant role in the downfall and subsequent recovery of the stock market. It is witnessed the role of pre-pandemic firm- specific characteristics is heterogeneous in intensifying/reducing the effect of fear on stock returns. Investor attention (Google search volume) and the growth of COVID-19 cases are also crucial to the stock market movements during the study period.
Article Details
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Al-Awadhi, A. M., Alsaifi, K., Al-Awadhi, A., & Alhammadi, S. (2020). Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance, 27, 100326. https://doi.org/10.1016/j.jbef.2020.100326
Albulescu, C. (2020). Coronavirus and financial volatility: 40 days of fasting and fear. SSRN Electronic Journal, 1–7. https://doi.org/10.2139/ssrn.3550630
Ali, M., Alam, N., & Rizvi, S. A. R. (2020). Coronavirus (COVID-19) — An epidemic or pandemic for financial markets. Journal of Behavioral and Experimental Finance, 27, 1–19. https://doi.org/10.1016/j.jbef.2020.100341
Almeida, H., Campello, M., & Weisbach, M. S. (2004). The cash flow sensitivity of cash. The Journal of Finance, LIX(4), 1777–1804. https://doi.org/10.2139/ssrn.345840
Altig, D., Baker, S., Maria, J., Bloom, N., Bunn, P., Chen, S., Davis, S. J., Leather, J., Meyer, B., Mihaylov, E., Mizen, P., Parker, N., Renault, T., Smietanka, P., & Thwaites, G. (2020). Economic uncertainty before and during the COVID-19 pandemic. Journal of Public Economics, 191, 104274. https://doi.org/10.1016/j.jpubeco.2020.104274
Anh, D. L. T., & Gan, C. (2020). The impact of the COVID-19 lockdown on stock market performance: Evidence from Vietnam. Journal of Economic Studies, 48(4), 1–16. https://doi.org/10.1108/JES-06-2020-0312
Ashraf, B. N. (2020). Stock markets’ reaction to COVID-19: Cases or fatalities? Research in International Business and Finance, 54(May), 101249. https://doi.org/10.1016/j.ribaf.2020.101249
Bai, L., Wei, Y., Wei, G., Li, X., & Zhang, S. (2021). Infectious disease pandemic and permanent volatility of international stock markets: A long-term perspective. Finance Research Letters, 40, 101709.
Baig, A. S., Butt, H. A., Haroon, O., & Rizvi, S. A. R. (2021). Deaths, panic, lockdowns and US equity markets: The case of COVID-19 pandemic. Finance Research Letters, 38, 101701.
Baker, S. R., Bloom, N., Davis, J., Kost, K., Sammon, M., & Viratyosin, T. (2020). The unprecedented stock market reaction to Covid-19. The Review of Asset Pricing Studies, 10(4), 742–758. https://doi.org/10.1093/rapstu/raaa008
Bannigidadmath, D., & Narayan, P. K. (2016). Stock return predictability and determinants of predictability and profits. Emerging Markets Review, 26, 153–173.
Bashir, H. A., & Kumar, D. (2021). Investor attention, uncertainty and travel & leisure stock returns amid the COVID-19 pandemic. Current Issues in Tourism, 25(1), 28–33. https://doi.org/10.1080/13683500.2021.1910633
Bates, T. W., & Kahle, K. M. (2009). Why do US firms hold so much more cash than they used to? The Journal of Finance, LXIV(5), 1985–2021. https://doi.org/10.2139/ssrn.927962
Beck, T., Demirgüç?Kunt, A., & Maksimovic, V. (2005). Financial and legal constraints to growth: Does firm size matter? The Journal of Finance, LX(1).
Brooks, C. (2019). Introductory Econometrics for Finance (4th ed.). Cambridge University Press.
Brown, S. J., & Warner, J. B. (1980). Measuring security price performance. Journal of Financial Economics, 8(3), 205–258. https://doi.org/10.1016/0304-405X(80)90002-1
Brown, S. J., & Warner, J. B. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics, 14(1), 3–31. https://doi.org/10.1016/0304-405X(85)90042-X
Caggiano, G., Castelnuovo, E., & Kima, R. (2020). The global effects of Covid-19- induced uncertainty. Economics Letters, 194(June 2019), 109392. https://doi.org/10.1016/j.econlet.2020.109392
Campello, M., Graham, J. R., & Harvey, C. R. (2010). The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), 470–487. https://doi.org/10.1016/j.jfineco.2010.02.009
Capelle-Blancard, G., & Desroziers, A. (2020). The stock market is not the economy? Insights from the COVID-19 crisis. Insights from the COVID-19 Crisis (June 16, 2020). CEPR Covid Economics. http://dx.doi.org/10.2139/ssrn.3638208
Cepoi, C. O. (2020). Asymmetric dependence between stock market returns and news during COVID-19 financial turmoil. Finance Research Letters, 36, 101658. https://doi.org/10.1016/j.frl.2020.101658
Chen, M. H., Jang, S. S., & Kim, W. G. (2007). The impact of the SARS outbreak on Taiwanese hotel stock performance: An event-study approach. International Journal of Hospitality Management, 26(1), 200–212.
Ciner, C. (2021). Stock return predictability in the time of COVID-19. Finance Research Letters, 38, 101705. https://doi.org/10.1016/j.frl.2020.101705
Contessi, S., & De Pace, P. (2021). The international spread of COVID-19 stock market collapses. Finance Research Letters, 101894. https://doi.org/10.1016/j.frl.2020.101894
Cox, J., Greenwald, D. L., & Ludvigson, S. C. (2020). What Explains the COVID-19 Stock Market? [Working Paper No. 27784]. National Bureau of Economic Research. https://doi.org/10.3386/w27784
Ding, W., Levine, R., Lin, C., & Xie, W. (2021). Corporate immunity to the COVID-19 pandemic. Journal of Financial Economics, 141(2), 802–830. https://doi.org/10.3386/w27055
Dyckman, T., Philbrick, D., & Stephan, J. (1984). A comparison of event study methodologies using daily stock returns: A simulation approach. Journal of Accounting Research, 22, 1–30. https://doi.org/10.2307/2490855
Economic Survey. (2021). Economic Survey of India.
Elflein, J. (2021). COVID-19 cases worldwide as of July 23, 2021, by country. Statista.
Engelhardt, N., Krause, M., Neukirchen, D., & Posch, P. N. (2021). Trust and stock market volatility during the COVID-19 crisis. Finance Research Letters, 38, 101873.
Evans, O. (2020). Socio-economic impacts of novel coronavirus: The policy solutions. BizEcons Quarterly, 7(March), 3–12. https://EconPapers.repec.org/RePEc:ris:buecqu:0013
Fahlenbrach, R., Rageth, K., & Stulz, R. M. (2021). How valuable is financial flexibility when revenue stops? Evidence from the COVID-19 crisis. The Review of Financial Studies, 34(11), 5474–5521. https://doi.org/10.1093/rfs/hhaa134
Fama, E. F., Fisher, L., Jensen, M. C., & Roll, R. (1969). The adjustment of stock prices to new information. International Economic Review, 10(1), 1. https://doi.org/10.2307/2525569
Fernandez-Perez, A., Gilbert, A., Indriawan, I., & Nguyen, N. H. (2021). COVID-19 pandemic and stock market response: A culture effect. Journal of Behavioral and Experimental Finance, 29, 100454.
Field, L. C., & Hanka, G. (2001). The expiration of IPO share lockups. The Journal of Finance, 56(2), 471?500. https://doi.org/10.2139/ssrn.205011
Fullman, N., Yearwood, J., Abay, S. M., Abbafati, C., Abd-Allah, F., Abdela, J., Abdelalim, A., Abebe, Z., Abebo, T. A., & Aboyans, V. (2018). Measuring performance on the healthcare access and quality index for 195 countries and territories and selected subnational locations: A systematic analysis from the Global Burden of Disease Study 2016. The Lancet, 391(10136), 2236–2271.
Gormsen, N. J., & Koijen, R. S. J. (2020). Coronavirus: Impact on stock prices and growth expectations. [Working Paper No. 2020–22]. University of Chicago, Becker Friedman Institute for Economics
Harjoto, M. A., Rossi, F., & Paglia, J. K. (2021). COVID-19: Stock market reactions to the shock and the stimulus. Applied Economics Letters, 28(10), 795–801.
Henderson Jr, G. V. (1990). Problems and solutions in conducting event studies. Journal of Risk and Insurance, 57(2), 282–306. https://doi.org/10.2307/253304
Iyke, B. N., & Ho, S. Y. (2021). Investor attention on COVID-19 and African stock returns. MethodsX, 8, 101195. https://doi.org/10.1016/j.mex.2020.101195
Just, M., & Echaust, K. (2020). Stock market returns, volatility, correlation and liquidity during the COVID-19 crisis: Evidence from the Markov switching approach. Finance Research Letters, 37, 101775. https://doi.org/10.1016/j.frl.2020.101775
Kaplanski, G., & Levy, H. (2010). Sentiment and stock prices: The case of aviation disasters. Journal of Financial Economics, 95(2), 174–201. https://doi.org/10.1016/j.jfineco.2009.10.002
Kolaric, S., & Schiereck, D. (2016). Are stock markets efficient in the face of fear? Evidence from the terrorist attacks in Paris and Brussels. Finance Research Letters, 18(C),306–310. https://doi.org/10.1016/j.frl.2016.05.003
Kothari, S. P., & Warner, J. B. (2007). Econometrics of event studies. In Handbook of empirical corporate finance (pp. 3–36). Elsevier.
Liu, H., Manzoor, A., Wang, C., Zhang, L., & Manzoor, Z. (2020). The COVID-19 outbreak and affected countries stock markets response. International Journal of Environmental Research and Public Health, 17(8), 1–19. https://doi.org/10.3390/ijerph17082800
Liu, H., Wang, Y., He, D., & Wang, C. (2020). Short term response of Chinese stock markets to the outbreak of COVID-19. Applied Economics, 52(53), 5859–5872.
MacKinlay, A. C. (1997). Event studies in economics and finance. Journal of Economic Literature, 35(1), 13–39.
Mazur, M., Dang, M., & Vega, M. (2021). COVID-19 and the march 2020 stock market crash. Evidence from S&P1500. Finance Research Letters, 38, 101690.
McWilliams, A., & Siegel, D. (1997). Event studies in management research: Theoretical and empirical issues. Academy of Management Journal, 40(3), 626–657. https://doi.org/10.5465/257056
McWilliams, A., Siegel, D., & Teoh, S. H. (1999). Issues in the use of the event study methodology: A critical analysis of corporate social responsibility studies. Organizational Research Methods, 2(4), 340–365. https://doi.org/10.1177/109442819924002
Mogaji, E. (2020). Financial vulnerability during a pandemic: Insights for coronavirus disease (COVID-19). Mogaji, E, 57–63. https://doi.org/10.2139/ssrn.3564702
Onali, E. (2020). COVID-19 and stock market volatility. SSRN, 1–24. https://doi.org/10.2139/ssrn.3571453
Papadamou, S., Fassas, A., Kenourgios, D., & Dimitriou, D. (2020). Direct and indirect effects of COVID-19 pandemic on implied stock market volatility: Evidence from panel data analysis. [Working Paper No. 100020]. University Library of Munich, Germany.
Phan, D. H. B., & Narayan, P. K. (2020). Country responses and the reaction of the stock market to COVID-19—A preliminary exposition. Emerging Markets Finance and Trade, 56(10), 2138–2150.
Rahman, M. L., Amin, A., & Al Mamun, M. A. (2021). The COVID-19 outbreak and stock market reactions: Evidence from Australia. Finance Research Letters, 38, 101832.
Ramelli, S., & Wagner, A. (2020). Feverish stock price reactions to COVID-19. Swiss Finance Institute Research Paper Series, 20(12). https://doi.org/10.2139/ssrn.3550274
Rao, P., Goyal, N., Kumar, S., Hassan, M. K., & Shahimi, S. (2021). Vulnerability of financial markets in India: The contagious effect of COVID-19. Research in International Business and Finance, 101462.
Singh, B., Dhall, R., Narang, S., & Rawat, S. (2020). The outbreak of COVID-19 and stock market responses: An event study and panel data analysis for G-20 countries. Global Business Review, 1–26. https://doi.org/10.1177/0972150920957274
Smales, L. A. (2020). Investor attention and the response of US stock market sectors to the COVID-19 crisis. Review of Behavioral Finance, 13(1), 20–39. https://doi.org/10.2139/ssrn.3625487
Smales, L. A. (2021). Investor attention and global market returns during the COVID-19 crisis. International Review of Financial Analysis, 73, 101616. https://doi.org/10.2139/ssrn.3623915
Statista. (2021). Estimated cost due to COVID-19 in India 2020. Statista Research Department.
Strong, N. (1992). Modelling abnormal returns: A review article. Journal of Business Finance & Accounting, 19(4), 533–553. https://doi.org/10.1111/j.1468-5957.1992.tb00643.x
Szmigiera, M. (2021). Impact of coronavirus pandemic on global economy Statistics & Facts. Statista.
WHO. (2021). WHO Coronavirus (COVID-19) Dashboard.
WorldoMeter. (2021). World Population by Country. World Population by Country.
Xiong, H., Wu, Z., Hou, F., & Zhang, J. (2020). Which firm-specific characteristics affect the market reaction of Chinese listed companies to the COVID-19 pandemic? Emerging Markets Finance and Trade, 56(10), 2231–2242. https://doi.org/10.1080/1540496X.2020.1787151
Yoshino, N., Taghizadeh-Hesary, F., & Otsuka, M. (2021). Covid-19 and optimal portfolio selection for investment in sustainable development goals. Finance Research Letters, 38, 101695.
Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36, 101528. https://doi.org/10.1016/j.frl.2020.101528