key: cord-0827151-caherjrf
authors: Liu, Feng; Kong, Deli; Xiao, Zilong; Zhang, Xiaohui; Zhou, Aimin; Qi, Jiayin
title: Effect of Economic Policies on the Stock and Bond Market under the Impact of Covid-19——Empirical Data Analysis Based on Date From 26 Countries
date: 2021-10-30
journal: Journal of Safety Science and Resilience
DOI: 10.1016/j.jnlssr.2021.10.006
sha: 0aaa9a5b87015b6b2d0be90da092b01b9f3a2c73
doc_id: 827151
cord_uid: caherjrf

The global epidemic of COVID-19 has made a huge impact on global health and financial markets. And the spread of the virus has stalled economic development in many parts of the world. As stocks and bonds are two important financial assets, How to take appropriate economic policies to restore the stock and bond markets is the focus of governments as they are seeking for quick recovery. Based on the Event Study method and the GARCH model, data from 1 October 2019 to 1 April 2020 were collected from 26 countries as analytic samples. The results show: 1) COVID-19 has made greater impacts on the stock market than the bond market; 2) the economic policy responses after the COVID-19 has brought impacts on both of the stock and the bond markets; 3) the monetary policy responses has brought greater volatility to the stock market than the fiscal policy responses, while the fiscal policy responses has brought greater volatility to the bond market than the monetary policy, 4) the fiscal policy has brought more positive effects on the stock market, and monetary policy has brought more positive effects on the bond market. This research is helpful to understand the mechanism of COVID-19′s impacts on the stock and bond market. And it is of great practical significance to the governments’ decisions to make economic policy responses after an epidemic.

From the beginning of 2020, the rapid spread of COVID-19 is a typical major public health emergency, which has been announced by the World Health Organization (WHO) as a global epidemic on 11 th March 2020. And it not only has posed series threats to public health, but also has brought a great impact on the global financial market. Global financial institutions and investors have been hit hard by the plunge in stock and bond prices. This was due to uncertainty about what would happen following the end of COVID-19. As an important financing tool and a barometer reflecting investor confidence, the return level of stocks and bonds also fluctuated significantly during the epidemic period. In order to stabilize market confidence and restore economic development, how to help the stock and bond markets get back to the normal level has become one of the most important issues for governments to be solved.

Throughout the world, fiscal and monetary policies have been used as two powerful macroeconomic control tools to influence economic and financial market volatility. Many countries and governments also released a series of monetary and fiscal policies to help relieve the impact of COVID-19. For example, the fiscal policy events include safeguarding the domestic health care system and reducing or deferring tax costs for businesses and individuals [1] . Monetary policies, on the other hand, dominated by the central bank, events include interest rate cuts and increased purchases of treasury and corporate bonds [1] .

However, the COVID-19's duration, wide scope, and its ponderance are far beyond any previous financial crisis and emergencies in the last decade, and its impact on the world financial market is more complex and changeable. Therefore, it is of great theoretical and practical significance, to study the effect of the COVID-19 on the financial market and the effect of macroeconomic policies on the financial market, to help understand the effect mechanism of emergencies on the stock and bond markets, the formation mechanism of return and volatility of the stock and bond market, and also help to accurately grasp the direction and strength of macro-policy tools.

To investigate the effect of fiscal and monetary policies on financial markets under the epidemic shock, this paper empirically investigates the effect of the COVID-19 epidemic on stock and bond markets and the effect of the above two types of policies on the recovery of stock and bond markets, using 26 countries as the analysis sample. The contributions of this paper include: based on the cross-country panel data, empirically examining the effect of economic policies on return and volatility of the stock and bond market; according to the results of the study, this paper puts forward suggestions and the direction of regular fiscal and monetary policies, and provides decision support for relevant departments to deal with the effect of the epidemic and boost financial markets. This analysis offers a brief overview of the economic policies during different stages of COVID-19, with focus on the effects on stocks and bonds markets.

As an outbreak with significant public health implications, numerous studies have shown that the epidemic may drag down the economic growth rate in the short term, and eventually spread to financial markets and creating a significant shock to it. Luo (2020) [2] pointed out that the COVID-19 epidemic may interrupt the weak enterprise stability of China's economy since the end of 2019, worsen the operating efficiency and expectations of enterprises, reduce the growth rate of residents' income, increase employment pressure, and push up debt and financial risks. By constructing a DSGE model of the COVID-19 epidemic, Zhu Jun et al. (2020) [3] pointed out that the epidemic would have a negative short-term phase impact on the domestic economy. Liu Liange (2021) [4] analyzed that, with the new COVID-19 epidemic raging around the world, financial market liquidity accelerated contraction, all kinds of assets were sold off across the board, the magnitude of the price decline, the strength of the rapid global rare. Hao (2021) [5] argued that the spread of the COVID-19 epidemic has made the internationalization of the RMB difficult, and the "de-Chineseization" of the financial sector was underway. International researchers believe that as this epidemic spreads rapidly around the world, economic activities in various countries contract sharply and investor and consumer confidence declines, which will have a large impact on global financial markets. Ozili and Arun (2020) [6] suggested that restrictions on international travel and other monetary policy decisions to protect home countries would severely affect the global economy. Morne et al. (2020) [7] stated that worldwide production shutdowns and supply chain disruptions could cause global ripple effects in all economic sectors in an unprecedented manner due to the COVID-19 epidemic. Ramelli and Wagner (2020) [8] argued that the health crisis caused by the COVID-19 epidemic has transformed into a global economic crisis and exacerbated this crisis through financial channels. Claudio Borio (2020) [9] pointed out that this economic and financial crisis, unlike the recession caused by structural imbalances in the economy, is entirely exogenous, highly uncertain and has truly global implications.

As powerful macroeconomic regulation tools, fiscal and monetary policy can affect the stock market and bond market to a certain extent and have also become financial market regulation tools to deal with the impact of unexpected events such as COVID-19. Chao Jiangfeng et al. (2015) [10] demonstrated that government spending could significantly weaken the extent of the economic impact of rare disasters. Lu Zhengwei suggested that the U.S. and Japanese central banks have also adopted large-scale cross-delivery policies to safeguard economic stability after unexpected events such as terrorist attacks and earthquake disasters 1 .The analysis of Ma, Yong and Liu, Linxiao (2020) [11] and Wang, Meimei and Zhao, Xuejun (2020) [12] indicated that a reasonable combination of fiscal and monetary policies could strongly support economic recovery and effectively stabilize the economic and financial system in response to unexpected events such as the SARS epidemic in 2003 and the financial crisis in 2008 [11, 12] . However, some policies may also have a negative effect on the economic development in the later stage of the event, such as large-scale government purchases leading to the solidification and the generation of surplus of the industrial economic structure [12] . Zhu Jun et al. (2020) pointed out that fiscal policy intervention could alleviate the negative effect of COVID-19 epidemic through their constructed DSGE model [3] .

Combing the previous studies, it can be found that most of the existing literature focuses on the impact of emergencies such as the epidemic situations on macroeconomic fluctuations, and it is generally believed that emergencies will lead to a short-term economic downturn. In terms of response measures, many scholars have focused on the effects of fiscal and monetary policies on the economy under the emergency, but research on the effects of fiscal and monetary policies on the stock and bond markets after the combination of the emergency is relatively limited. The effect of economic policies, including fiscal and monetary policies on the stock and bond markets in the context of the current epidemic situation is still under-researched.

The increased social management costs, increased unemployment dynamics, and reduced economic vitality resulting from the COVID-19 epidemic are far from any 1 http://finance.sina.com.cn/zl/bank/2020-02-18/zl-iimxyqvz3824787.shtml previous emergency. Accordingly, it is of theoretical and practical value to quantify the financial market shocks caused by the COVID-19 epidemic and to analyze the role of economic policies in mitigating the afore-mentioned shocks. Based on this, this paper attempts to answer the following research questions: What is the effect of the COVID-19 pandemic on the stock and stock markets? What is the role of adopted fiscal and monetary policies in responding to the financial market shocks caused by the COVID-19 pandemic? How can future fiscal and monetary policies be oriented to further rationalize the effect of the COVID-19 pandemic? 3 Study design

Stocks and bonds are two of the most important securities in the financial market.

Both of them are the main investment places for institutional and individual investors.

Thus keeping the stock and bond market relatively stable plays an important role in supporting the stability and development of the financial market. The occurrence of emergencies could have great effects on the return of both the stock and bond market, and it could also make the stock and bond market fluctuate violently. Event Study focuses on the impact of events on stock prices or corporate value. Therefore, this paper analyzes the effect of the new crown epidemic outbreak on stock market and bond market returns and volatility based on the Event Study methodology. The main steps include:

represents 

The expected return after the event is called the normal return, and the abnormal return can be obtained by subtracting the normal return from the actual return. Let , and represents the length of the estimation window. Since the stock indices of each country have been used as the underlying stock market studied in this paper, the mean-adjusted model is used to calculate the expected return (the expected return of the subject in the period ) within the event window, and the mean-adjusted model uses the average of the returns of the underlying in the estimation window as the expected return within the event window.

The abnormal return of the i-th underlying in period t is then denoted by , and the abnormal return is obtained by subtracting the actual return from the normal return:

3) The Test of Abnormal Return: The cumulative abnormal return is calculated based on the abnormal returns estimated in the previous step, and the statistical significance test of abnormal return and cumulative abnormal return is carried out.

, when the subject in the period , the Cumulative abnormal return (CAR) can be calculated. Moreover, in order to remove the cross-sectional effect of the target and multiple event factors, the average abnormal return AR_avg and the average cumulative abnormal return CAR_avg can be obtained by crosssectional averaging.

The Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model can effectively solve the heteroskedasticity problem of time series. Hence, the study of stock and bond market volatility in this paper is based on the GARCH model, and since the effect of unexpected events on market volatility is to be considered, exogenous dummy variables need to be introduced into the conditional variance equation when setting up the GARCH model.

The following ARIMA-GARCH transfer function models are established for the stock and bond market separately:

Where and represent the sequence of return in the stock and bond market, and are model constants, ( -) represents the exogenous virtual variable and its lag order in the emergencies, while and represent the return sequence and the lag order of the error sequence respectively. Numerous studies have shown that financial market returns have conditional heteroskedasticity. According to Engle's (1982) ARCH model, it is assumed that the stationary random variable can be expressed as the order autoregressive form (formula 7), And the variance of the random error term can be represented by the order distribution lag model of the square of the error term (formula 8):

Both the mean equation (formula 7) and the variance equation (formula 8) constitute the ARCH model. To avoid too many lagged terms in , according to the GARCH model proposed by Bollerslev (1986), a general expression GARCH is as below, which contains ARCH items and GARCH items:

The GARCH model is mainly used to estimate volatility. GARCH(1,1) is sufficient to characterize conditional heteroscedasticity in financial markets. Therefore, this paper uses the GARCH (1, 1) model to extract the series of conditional heteroskedasticity of returns in the stock and bond markets to measure the volatility of the corresponding markets. The expression of the GARCH (1, 1) model is:

For the purpose of investigating the conditional heteroscedasticity of return errors in stock and bond markets and the effect of emergencies on error terms, the variance of error terms in formula 5 and 6 is introduced into formula11: and region to represent their stock and bond market respectively. Based on the availability of data, a total of 26 countries from five continents were chosen as the sample for analysis, The stock market data is extracted from Tonghuashun iFinD database, and the bond market data is extracted from Investing.com, The study period is from 1 Oct 2019 to 1 Apr 2020.

The data on economic policies issued by governments and regulators in various countries and regions around the world during the epidemic period is extracted from the epidemic's major events topic in the Flush iFinD database. By analyzing the content of each event, they are categorized into secondary categories, and the economic policies are divided into fiscal stimulus policies, open market operations, interest rate adjustments (rate cuts and reductions) and bond issuance. The statistics of events after secondary categorization and collation are shown in Table 1 .

The results of descriptive statistics of global stock market returns are shown in Table   2 , and the global bond market returns are shown in Table 3 . From the descriptive statistics in Table 2 , it can be seen that the mean values of global stock market returns were negative and under-performed during the sample period, with the worst performance of the average return of the European stock market; in terms of standard deviation, the Asian stock market had the smallest standard deviation and the South American stock market had the largest standard deviation, reflecting the higher volatility of South American stock markets.

From the descriptive statistics in Table 3 , it can be seen that most of the mean values of global bond market return were positive during the sample period, with the average return of the European bond market generally under-performing; in terms of standard deviation, the standard deviation of the European bond market was the smallest, and the standard deviation of the South American bond market was the largest, which reflected the greater volatility of the South American bond market.

We map the stock markets and bond markets return from 26 countries and regions in the study period from 1 Oct 2019 to 1 Apr 2020. The time series Figure 1 shows that global stock market returns have suffered a very significant negative shock (all 26 countries and regions have experienced a deterioration in stock market returns) since the beginning of this year's epidemic period, and volatility has also increased significantly and sharply.

From the time series chart in Figure 2 , we can see that the global bond market returns have suffered a certain degree of negative effect since the beginning of this year's epidemic in most countries and regions, while the bond market return has strengthened in a few countries and regions (e.g. Italy, Spain, etc.), and the volatility of bond market returns has also increased, but obviously not as dramatically as in the stock market. It is recommended that different countries should differentiate their policies according to their own culture and specific goals.

We use the release date of the economic policy in various countries and regions around the world as the event date, marked as day=0, then the event window selects [-10, 10], the estimation window selects [-60, -11] , and the post window selects [11, 30] . The above time window excludes the non-trading day. In this paper, we calculate the expected return based on equation 1, and then calculate the abnormal return and the cumulative abnormal return in the event window based on equation 4.

This section mainly examines the effect of economic policy events on the return of the stock and bond market. The subjects that release economic policy events are generally Central Banks, Ministries of Finance and other government departments of each country or region, the World Bank, the European Central Bank, the G20, the Basel Committee, etc. Economic policies include fiscal stimulus, bank rule changes, open market operations, social welfare and subsidies, and interest rate cuts and reductions.

The effects of economic policy event releases on the AR and CAR of the global stock market are shown in Figures 3 and 4 , respectively, and the effects of economic policy event releases on the AR and CAR of the global bond market are shown in Figures 5  and 6 , respectively.

From the above AR and CAR charts, we can see that the release of economic policy events had a significant effect on both the global stock market and bond market;

Compared with the AR、CAR chart of the two markets, the effect of economic policy events on the stock market was greater than that of the bond market during the epidemic. And the CAR of the stock market in all 26 countries or regions was on a downward trend, indicating that economic policy stimulus released (active fiscal policy or easing monetary policy) during the epidemic, however, the financial markets did not buy it in the short term, but became more panicked, which accelerated the market decline. However, the CAR of the bond market, although most countries or regions were also on a downward trend, was significantly slower than the stock market, and there are even some countries or regions where the CAR of the bond market was on a parallel or even upward trend.

To examine the differences in the effect of prevention and control policy on AR and CAR in the event window in a more granular manner, we capture AR values in the short term (the day before the policy (event) release day=-1, event released day=0, the day after the event day=1), and then split CAR[-10, 10] into four periods [-10, -5], (-5, 0], (0, 5], (5, 10] to examine the differences of the effect of policy (events) in different time periods. We also carry out group analysis based on different dimensions (country and region, area, secondary category). Because the number of events involved in each group is different, referring to the previous methods, we weighted the event intensity of the AR, CAR in the group, and then get AR Table 4, comparing CAR[-10, 10] for the stock and bond markets, the global stock market's cumulative abnormal returns were on average 11.68% lower than those for the bond market during the economic policy event window, in terms of the significance of ARs and CARs at a finer granularity within the event window, the bond market was more significant than the stock market, and the p-values for the stock market were mostly insignificant; the stock market and bond markets differed in terms of the performance found that for the stock market, the fiscal policy effect was -10.87% and the monetary policy effect was -19.72%, and for the bond market, the fiscal policy effect was -4.01% and the monetary policy effect was -3.38%.

From the above analysis, it can be found that the stock market reacted more violently to the economic policy (-15.3% to the global stock market) and the event release of the economic policy deepened the decline of the stock market (deepened by 4.95%); however, the bond market reacted more moderately to the economic policy (-3.7% to the global bond market) and the event release of the economic policy narrowed the decline of the bond market ( narrowing by 2.95%).

We map the volatility of stock and bond markets from 1 Oct 2019 to1 Apr 2020 of 26 countries and regions around the world. From Figure 7 , it can be seen that the volatility of the global stock market has increased significantly since the outbreak of this year, especially in Brazil, Canada, Italy, etc. From Figure 8 , it can be seen that since the outbreak, bond market volatility has increased significantly in most countries and regions, and particularly in a few countries and regions (such as Argentina, Canada, the United States, etc.). Among them, Argentina's bond market volatility was the highest in the world, more than 100 times higher than other countries, which may even lead to the risk of triggering a sovereign debt crisis. Overall, with the exception of Argentina, bond market volatility increased significantly during the epidemic, but compared with the stock market, bond market volatility averaged only 1% of the stock market.

We use the release date of the economic policy in various countries and regions around the world as the event date, marked as day=0, then the event window selects [-10, 10]. The above time window excludes the non-trading day. In order to analyze the effect of prevention and control events on financial market volatility, we only retain the GARCH data in the event window [-10,10] . Because the order of magnitude of the GARCH data is small, we square the original GARCH value, get the standard deviation data sequence, and then based on the event window, we get the mean value of the standard deviation data sequence, as the final GARCH value affected by the event. The release of economic policy had a significant effect on stock and bond market volatility in 26 countries or regions around the world; As shown in Table 5 , comparing the GARCH of the stock and bond markets, the volatility of the stock market in the economic policy event window was 4.24% on average, the volatility of the bond market was 0.92% on average, and the average volatility of the stock market was 3.32 percent higher than that of the bond market, with the exception of Argentina, whose bond market was 8.31% higher than that of the stock market, which again fully illustrated that Argentina's bond market was extremely turbulent due to the epidemic, and there may be even a risk of triggering a sovereign debt crisis.

Most of the different types of economic policy event releases had a significant effect on the volatility of the global stock and bond market. According to the results in Table  7 and monetary policy (bank rule changes, rate cuts, interest rate adjustments, foreign exchange facilitation, and short-selling bans) using GARCH means, it can be found that for the stock market, the effect of fiscal policy on market volatility was 4.16% and the effect of monetary policy was 4.7%, and for the bond market the effect of fiscal policy on market volatility was 0.57%, and the effect of monetary policy was 0.53%. It is suggested that policy makers may give more priority to fiscal policy as appropriate.

The above results indicate that the issuance of economic policy events has increased the volatility of stock markets (an increase of 1.02%). However, the volatility of the bond market reacted more moderately to the economic policies (an impact of 0.55% on global bond market volatility), and the event release of economic policies reduced the volatility of the bond market (a decrease of 0.15%).

This paper examines the effect of impact of COVID-19 epidemic on the stock and bond market return and volatility through an event study approach. It first focuses on the effect of the epidemic event release on global stock and bond market return and volatility, and further considers different economic policies, compare the effects of fiscal policies (fiscal stimulus, open market operations, social benefits and subsidies) and monetary policies (rate cuts, interest rate adjustments, short-selling bans) , and explore the effects of both types of policies on the recovering stock and bond markets. The conclusions of this paper include:

1)The effect of COVID-19 on the stock market was greater than that on the bond market, that is, the return and volatility of the stock and bond market in most sample countries have been very obvious negative impact since entering this year's epidemic period, but the return volatility of the stock market is more severe than that of the bond market ;

2)Second, the economic policies after COVID-19 can bring significant effect on both stock and bond markets, that is, the release of the economic policy event prompted an increase in both stock and bond market return declines and volatility, but the stock market reacted more sharply, with the cumulative abnormal returns in the stock market averaging 11.68% lower than the bond market during the economic policy event window, and the stock market volatility averaging 3.32% higher than the bond market. Third, monetary policy brought more volatility to the stock market than fiscal policy, that is, the effect of fiscal policy on market volatility was 4.16% and monetary policy effect was 4.7%. For the bond market, fiscal policy brought more volatility to the bond market than monetary policy, that is, the effect of fiscal policy on market volatility was 0.57% and the monetary policy effect was 0.53%. Fourth, the stock market, fiscal policy implementation brought better returns, the effect of fiscal policy was -10.87% and the effect of monetary policy was -19.72%; while for the bond market, monetary policy brought better returns, i.e., the effect of fiscal policy was -4.01% and the effect of monetary policy was -3.38%.

According to the research results of this paper, the following suggestions are made for the global stock and bond markets: 1) Financial markets are quite sensitive to economic policies. Therefore, when considering the release of economic policies, governments or regulators need to be very careful.

In order to consider reducing the effect of economic policies on stock markets and reduce the risk of volatility, it is suggested that more preference be given to monetary policy formulation.

In order to consider reducing the impact of economic policies on bond markets and reduce the risk of volatility, it is suggested that more preference be given to fiscal policy formulation.

Fourth, through the study of financial markets of 26 countries around the world, it is recommended that policies for different countries and regions should be differentiated to achieve a categorical approach. It provides a stable financial market environment for economic recovery and resumption of production after emergencies by considering the specific national policy types, stock and bond markets, and reducing the risk of market volatility.

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

This study is supported by the Sino -German Research Network Digitalization and Aging (GZ 1570). We would like to thank the anonymous reviewers for their valuable suggestions.

The data is available at https://github.com/shenciyou/economy_policy_covid19 

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