The behaviour of financial markets during COVID-19

Abstract

What is the effect of a growth in the number of confirmed COVID-19 cases on the stock returns in a country? To answer that question this research investigates the behaviour of stock markets, in relation with the daily growth in the number of confirmed COVID-19 cases in 55 countries during the pandemic. The model is estimated on a sample of high-frequency daily panel data over the period 1/1/2020 to 23/04/2021. To ensure that the effect of interest is not affected by other factors, I control for a number of variables related to news coverage, government interventions, culture, and a number of key asset pricing factors. The results indicate that, in line with the hypothesis, a growth in the number of confirmed COVID-19 cases has a negative effect on stock returns in a country. The results show that on a day with a growth rate in the number of infections of 22,31% (median growth rate, when the growth rate is above zero) the index return is -0,0057% instead of 0,0179% (mean index return).The robustness analysis shows that this effect holds during periods with a peak in the number of infections, but not during periods with fewer infections. Furthermore, the effect of an increase in the daily growth rate is twice as strong in Europe than in the rest of the world.