The stock market and COVID-19 by Dr. Maya Katenova

the stock market and COVID-19

by Dr. Maya Katenova

Indeed, the COVID-19 pandemic has had a down turning effect on the stock markets as companies experienced shortage of revenues due to lockdown measures. The COVID-19 pandemic’s effect on the stock market is evident around the world; however, the degree of impact tends to vary from country to country. Baek and et al., (2020) studied the impact of COVID-19 on the U.S. stock market via application of the Markov Switching AR Model. Application of the model enables us to focus on lower as well as higher volatilities in the stock market performance. The analysis included selected economic variables, which had direct relationships with stock market performance in line with machine learning variables. The study included several industries that were utilities, tourism, tobacco, petroleum and natural gas, consumer goods, food production, telecom and broadcasting, business equipment, personal and business services, steel, fabricated products & machinery, electrical equipment, automobiles & trucks, and healthcare. Industries were classified into Panel A and B. As the deviations were obtained, regression analysis was conducted. Overall, it was found that with an increasing total number of infected as well as deaths, the U.S. stock market became riskier. Systematic and idiosyncratic risk in all observed industries have increased. However, industry-level analysis revealed that systematic risk increased in case of defensive industries namely telecommunication and utilities. However, it was lower in case of aggressive industries such as automobiles and business equipment. Analysis of total risk across industries via combining economic variables as well as COVID-related variables demonstrated that stock market performance was more sensitive in case of news on COVID-related deaths as recoveries. Namely, news about the deaths were more influential in comparison with positive news on recoveries (Baek and et al., 2020).

Evidence from the Australian stock market revealed that COVID-19 has had an adverse impact on the overall Australian economy as well as stock market performance (Alam and et al., 2020). Nevertheless, negative impact was not evenly distributed among different sectors. It was found that some sectors represented in the Australian stock exchange have become highly vulnerable, while other sectors performed better. Analysis was based on eight different sectors, which included transportation, healthcare, pharmaceuticals, food, real estate, energy, telecommunications, and technology. The metadata analysis was derived from the Australian Securities Exchange (ASX). Specifically, authors analyzed risk-return characteristics on announcement of the events related to COVID-19 outbreak in each country. For instance, sectors including pharmaceuticals, healthcare, and food gained high positive gains when the COVID-19 outbreak was announced on February 27th, 2020. After the announcement and onwards, the aforementioned sectors, in line with telecommunications, exhibited positive returns whereas the transportation industry experienced downturns.

Khan, et al., (2020) analyzed the COVID-19 impact on the stock market performance in 16 countries through application of the OLS regression model. The analysis was based on the new COVID-19 cases reported on a weekly basis and stock returns. Overall, the analysis had demonstrated that an increase in the number of infected had a negative correlation with stock returns. Moreover, in order to assess overall stock market performance, it was decided to compare returns of leading indexes of selected countries in the pre-COVID period with the current period with COVID. Furthermore, it was found that investors had not reacted much to the news about the new cases at the beginning of pandemic. However, when it was announced that the virus is transmissible from a human to a human, all analyzed market indexes have reacted negatively in short and long-term.

The U.S. economy has been severely affected by the COVID-19 outbreak. Moreover, the country has experienced the largest death cases in the world due to inability of the government to sustain spread of the virus. Analysis of 125 different sectors of economy by focusing on the stock market returns was conducted in order to reveal industry-specific factors affecting stock returns. Hence, factors included in the analysis were industry-specific and macroeconomic ones. It was identified that systematic factors negatively affected industries such as airlines, real estate, aerospace, oil and gas, tourism, retail apparel, and brewers. These industries are highly dependent not on the macroeconomic measures undertaken by the government, but by the policies on sustaining the virus outbreak. Moreover, it was discovered that macroeconomic factors led to generation of losses in industries such as equipment production, machinery, electronic and electrical products (Thorbecke, 2020).

On the other hand, the study comparing the news announcements on new cases and fatality rates on the S&P 500 discovered that country-level and global news announcements improved the realized volatility of the S&P 500. It can be interpreted as virus-induced uncertainty about the future increased the stock market volatility. Hence, the longer the pandemic is, the higher will be the market volatility, which imposes significant financial risks (Albulescu, 2020).

The study of the COVID-19 impact on stock market performance in G-20 countries was conducted based on the event study to determine interrelationships between news on COVID-19 and abnormal stock returns (Singh and et al., 2020). The regression analysis was conducted in order to determine major causes of the stock return abnormality. The studied window included 58 days after the COVID-19 outbreak news was released in international news media. It was observed that there were negative abnormal returns within the first 58 days. Negative returns were observed in case of both developed and developing countries. Furthermore, cumulative average abnormal return (CAAR) from 0 to 43 days went from -0.7% to -42.69% as a consequence of the stock market shocks. Further, it was observed that from day 43 to 57, the CAAR was improved from -42.69% to -29.77%, which was a recovery of stock markets and price correction.

Aslam, et al., (2020) analyzed COVID impact on eight stock indexes of European Union countries from January 1st, 2020 to March 23rd, 2020. The Hurst variables have been calculated by implementing multifactorial detrended fluctuation analysis (MFDFA). It was identified that there was multifractality being observed in European stock markets during the COVID-19 pandemic. Multifractality played the main role in variances in the market efficiency.

Surprisingly, it was found that the Spanish stock market was the most efficient one, while the Austrian market was the least efficient one. Stock markets of countries such as Germany, Italy, and Belgium possessed the medium range of market efficiency. Haroon and Rizvi (2020) focused on the news media coverage of the COVID-19 spread and stock market behavior based on the sectoral analysis. The main assumption was that the panic caused by the news media coverage could have resulted in increased stock market uncertainty and stock price volatility.

author

Dr. Maya Katenova

Maya Katenova, DBA, PRM, DipPFM, Assistant Professor of Finance, KIMEP University. Maya teaches bachelor students as well as master students including Executive MBA students. She has received a Teaching Excellence Award in 2017. Courses taught in her portfolio include such courses as Financial Institutions Management, Ethics in Finance, Financial Institutions and Markets, Principles of Finance, Corporate Finance and Personal Finance. She supervised Master Thesis Dissertations of several students and has numerous publications in different journals including high quality (Q1-Q2) journals. Research interests are mostly related to financial literacy and retirement planning as well as corporate social responsibility and global ethics. Maya is Professional Risk Manager and is planning to teach Risk Management in future. Her future career is strongly connected with Risk Management Conferences, symposiums and workshops.

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