key: cord-0745424-zd2mb7wy
authors: Ashraf, Badar Nadeem
title: Stock markets’ reaction to COVID-19: cases or fatalities?
date: 2020-05-23
journal: Research in international business and finance
DOI: 10.1016/j.ribaf.2020.101249
sha: 3e2a63bbe5e7a226d88fc87d64358f280942b162
doc_id: 745424
cord_uid: zd2mb7wy

Abstract In this paper, we examine the stock markets’ response to the COVID-19 pandemic. Using daily COVID-19 confirmed cases and deaths and stock market returns data from 64 countries over the period January 22, 2020 to April 17, 2020, we find that stock markets responded negatively to the growth in COVID-19 confirmed cases. That is, stock market returns declined as the number of confirmed cases increased. We further find that stock markets reacted more proactively to the growth in number of confirmed cases as compared to the growth in number of deaths. Our analysis also suggests negative market reaction was strong during early days of confirmed cases and then between 40 to 60 days after the initial confirmed cases. Overall, our results suggest that stock markets quickly respond to COVID-19 pandemic and this response varies over time depending on the stage of outbreak.

Since its start from the Chinese city of Wuhan in early 2020, the COVID-19, an infectious disease caused by the new type of coronavirus SARS-CoV-2, is causing havoc around the world. World Health Organization declared it a pandemic on March 11. As of April 17, 2020, the number of confirmed patients has exceeded 2 million with around 139,000 already dead globally (WHO 2020) . Countries such as China, Italy, Iran, Spain, France, the United Kingdom and the United Stated have been hit hard so far with severe COVID-19 outbreaks. It is behaving like 'the once-in-a-century pathogen' (Gates 2020) .

The pandemic is causing huge impact on real economic activity, though the extent of actual impact is yet unknown. By the end of March 2020, more than 100 countries around the world had already instituted the partial or full lockdowns and air and intercity travel was down by 70 to 90 percent as compared to figures from March 2019 in major world cities affecting billions of people (Dunford et al. 2020) . Major cultural and supporting events have been suspended. National-level responses to the disease are also unprecedented. On the one hand, governments are taking emergency measures, such as shutdowns for social distancing and investments in testing and quarantining the suspected cases and treating the confirmed cases, to contain the disease. On the other hand, governments, from finance ministries to central banks, are rolling out support and stimulus packages to contain the economic damage.

In a recent pioneer study, Goodell (2020) presents a comprehensive literature survey regarding the economic impact of natural disasters, such as nuclear wars, climate change or localized disasters, and highlights that COVID-19 pandemic is inflicting unprecedented global destructive economic damage. He points out that the pandemic may have wide ranging impact on financial sector including stock markets, banking and insurance, and is a promising area for future research.

In this backdrop, our main objective in this study is to explore how stock markets across the world are responding to the COVID-19 pandemic. Since the disease has brought extreme uncertainty with respect to how deadly disease really is, whether and when can we get a vaccine, what effects government policies will have, how people will respond, and so on (Wagner 2020) , the reaction of stock market investors is also mixed with unprecedented volatility (Baker et al. 2020) . Stock markets are moving up and down with the news of COVID-19 and related control measures or stimulus packages such as direct fiscal support or decrease in interest rates, among others. For instance, US stock market observed three of the 15 worst days ever during March 9 to 16, while one of the top 10 surges ever in the market also took place in this time period (Wagner 2020) . Other international factors are also causing systematic risk and moving stock markets simultaneously with COVID-19. One such important factor which is having confounding impact on stock market volatility together with COVID-19 is the tussle between Saudi Arabia and Russia over oil supply and prices. On 6 th March, Russia refused to comply with the oil supply cut decision made by OPEC summit in Vienna on March 5, 2020. In response, Saudi Arabia made announcements on 8 th March regarding price discounts ranging from $6 to $8 per barrel for European and Asian customers and oil production increases. The stalemate is still going on to this day and resulting in additional uncertainty.

Using the available daily COVID-19 and stock market returns data from 64 countries over the period from January 22, 2020 to April 17, 2020, we examine the impact of growth in COVID-19 confirmed cases and deaths on the stock market returns after controlling for country characteristics and systematic risk due to international factors. Results of our analyses show that stock markets react strongly with negative returns to growth in confirmed cases, however response to the growth in deaths is not that statistically significant. Our results also show that stock markets react strongly during early days of confirmed cases and then between 40 to 60 days after the initial confirmed cases. Likewise, Zhang et al. (2020) found that COVID-19 has led to increase in global financial market risk. Extending this debate, we examine how stock market returns have responded to COVID-19 using data of major stock indexes from 64 countries.

The rest of the paper proceeds as follows: Section 2 outlines our sample construction procedures. Section 3 presents the empirical methodology briefly. Section 4 reports the results of empirical analyses. Final section concludes the study.

We started our sample construction by collecting the data of the number of confirmed cases and deaths from COVID-19 from the website of John Hopkins University (JHU)'

Coronavirus Resource Centre. This data is available on a daily frequency for more than 200 countries and regions, which have been affected by the disease till the day we downloaded data. Data starts from January 22, 2020 and ends at April 17, 2020. Next, we downloaded daily stock market return data from the www.investing.com website over the same period.

We included all those countries for which the stock market data was available on the website.

To get a consistent sample across countries, we used the data of only one major stock market index from each country. In the next step, we appended the daily COVID-19 data with daily stock market return data. Lastly, we collected data of country-level control variables and added with the daily data.

We applied several filters to refine the data. We dropped data of those countries for which the data of daily stock market returns or country-level control variables was not available. We left with the data of 64 countries after applying this filter. Next, from the remaining data, we dropped observations with missing values because although COVID-19 data is available for each day since a country observed first confirmed case, the stock markets data is not available for weekends or national gazetted holidays. After applying the second filter, our final dataset is from 64 countries with 2,424 observations over the period from January 22, 2020 to April 17, 2020. Table 1 lists the countries, the stock market index (the data of which was used for a country) and the number of daily data observations from each country. Besides, it also mentions the date when first COVID-19 case was confirmed in a country. The data for any specific country in sample starts from this date.

(Insert Table 1 here)

To examine the impact of change in COVID-19 confirmed cases/deaths on stock market returns, we prefer panel data analysis technique over the classical event study methodology due to several reasons: First, the spread of COVID-19 evolves over a matter of days in a country and is not a one point of time event. Second, panel data regression is better in capturing the time varying relationship between dependent and independent variables (Ashraf 2017) . Third, panel data analysis extracts both cross-sectional and time series variation from the underlying panel data and minimizes the problems such as multicollinearity, heteroscedasticty and estimation bias (Baltagi 2008; Woolridge 2010) .

Primarily, we specify following model.

Here, c and t subscripts represent country and day, respectively. αc is a constant term.

Dependent variable, Y, represents total stock market returns in county c on day t. Stock market return is measured as the daily change in major stock market index of a country.

COVID-19 represents (1) the daily growth in COVID-19 confirm patients and (2) these variables control for the cross-country variation in stock market returns due to institutional and macroeconomic differences across countries. Dt is a set of daily fixed-effects dummy variables to control for daily international events which move all stock markets.

These dummy variables effectively control for systematic risk due to international factors. Ɛc,t is an error term. We use heteroskedastic-robust standard errors to estimate p-values in regressions.

In this section, we present the results of our empirical analysis. (Insert Table 2 here) Table 3 reports the Pearson correlations between main variables. Daily growth in COVID-19 confirmed cases has a strong negative correlation with stock market returns. Table 3 here) The growth in deaths variable also enters negative (Models 4 and 5), however it loses significance when we add daily fixed-effects dummy variables to control for systematic risk due to international factors (Model 6). These results show that stock market response to the number of deaths is not strong.

(Insert Table 4 here)

Together these results suggest stock markets respond negatively and overwhelmingly to the growth in the number of confirmed cases while response to the number of deaths is not strong. This is not beyond expectation. Since death is an outcome of a confirmed case and usually occurs several days after one gets COVID-19 infection confirmation, sophisticated stock market investors price in the expected negative impact of COVID-19 early on from the growth in confirmed cases.

We perform several robustness tests to further confirm above main results: First, we re-estimate all specifications of Table 4 with panel random-effects regression method. In unreported results 1 , we observe that all results are quite similar to that in Table 3 . Second, to further confirm that our results are not driven by omitted variables in a cross-country setting, we re-estimate Eq. (1) by including country fixed-effects dummy variables instead of country-level control variables. As shown in Table 5 , growth in confirmed cases enters negative and significant while growth in deaths enters insignificant. These results are qualitatively similar to those reported in Table 4 and confirm that our main results are not biased due to omitted variables.

(Insert Table 5 here)

To get further insights into the specific market reaction over the days as COVID-19 situation evolves across countries, we calculate daily average stock market returns of all stock indexes over the same timeline from the 1 st confirmed case of COVID-19. As shown in confirmed cases. This is consistent with the outbreaks in China, Italy, Iran and Spain which reached to their peaks around 30 to 60 days from initial confirmed cases.

(Insert Figure 1 here) 

In this paper, we examine the stock market response to the COVID-19 pandemic.

Using daily COVID-19 confirmed cases and deaths and stock market returns data from 64 countries, we find that stock markets respond negatively to the increase in COVID-19 confirmed cases. That is, stock market returns decline as the number of confirmed cases increase in a country. We further find that stock market response to the growth in number of deaths due to the COVID-19 is weak. Together our findings suggest that stock markets price in COVID-19 pandemic related risks in stock prices early on when the number of confirmed cases increases and react less when some of the confirmed cases die later on. In more detailed analysis, we also observe that stock markets react strongly during early days of confirmed cases and then between 40 to 60 days after the day of initial confirmed cases. Overall, our analysis suggests that stock markets quickly respond to COVID-19 pandemic and this response varies over time depending on the severity of outbreak.

Badar Nadeem Ashraf carried out this research. This table reports the summary statistics of main variables. Stock market returns is measured as the daily change in major stock index of a country. Growth in confirmed cases is measured as the daily growth in COVID-19 confirmed cases in a country. Growth in deaths is measured as the daily growth in the number of COVID-19 patients died. Democratic accountability is taken from International Country Risk Guide database and represents the quality of political institutions. Uncertainty avoidance index is taken from Hofstede et al. (2010) and controls for cross-country differences in the level of uncertainty aversion in investors. Investment freedom is taken from Freedom House website and controls for stock market liberalization. Log (GDP) is taken for World Development Indicators (WDI) of World Bank and controls for the level of economic development. This table reports the results of robustness tests regarding the impact of COVID-19 on stock market returns after including country fixed-effect dummy variables in main model. Stock market returns is dependent variable in all models and is measured as the daily change in major stock index of a country. Growth in confirmed cases is measured as the daily growth in COVID-19 confirmed cases in a country. Growth in deaths is measured as the daily growth in the number of COVID-19 patients died.

The results are estimated with pooled OLS estimator using heteroskedasticity robust standard errors. P-values are given in parenthesis. ***, **,* represent statistical significance at 1%, 5%, and 10% levels, respectively. Figure 1： Stock market returns against the number of days from the date first COVID-19 case was confirmed in a country

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