How do equity markets react to COVID-19? Evidence from emerging and developed countries

Maretno Agus Harjoto; Fabrizio Rossi; Robert Lee; Bruno S Sergi

doi:10.1016/j.jeconbus.2020.105966

How do equity markets react to COVID-19? Evidence from emerging and developed countries

J Econ Bus. 2021 May-Jun:115:105966. doi: 10.1016/j.jeconbus.2020.105966. Epub 2020 Dec 3.

Authors

Maretno Agus Harjoto¹, Fabrizio Rossi², Robert Lee¹, Bruno S Sergi³

Affiliations

¹ Pepperdine Graziadio Business School, Pepperdine University, 24255 Pacific Coast Highway, Malibu, CA, 90263, USA.
² Department of Electrical and Information Engineering, University of Cassino and Southern Lazio, Via G. Di Biasio 43, Cassino, FR, 03043, Italy.
³ Harvard University & University of Messina, Italy.

Abstract

Based on the supply of stock market returns hypothesis, we argue that the unprecedented adverse shock of COVID-19 on the countries' economic growth translates into a negative shock to the stock markets. According to the institutional theory, we also argue that the impact of COVID-19 in emerging countries is different from developed countries. Based on the overreaction hypothesis, we expect that the market reaction during the stabilizing period of COVID-19 spread is different from the market reaction during the infection period. Using high-frequency daily data across 53 emerging and 23 developed countries from January 14 to August 20, 2020, we find that COVID-19 cases and deaths adversely affect stock returns and increase volatility and trading volume. Cases and deaths affected stock returns and volatility in the emerging markets, while only cases of COVID-19 affected stock returns, volatility, and trading volume in the developed markets. COVID-19 cases and deaths are related to returns, volatility, and trading volume for emerging countries during the rising infection of COVID-19 (pre-April 2020), while cases and mortality rates are related to returns, volatility, and trading volume in developed countries during the stabilizing spread (post-April 2020). Therefore, the emerging markets' investors seem to react to COVID-19 cases and mortality rates differently from those in the developed markets across two different periods of COVID-19 infection.

Keywords: COVID-19; Daily cases and deaths; Emerging and developed countries; Stock return; Trading volume; Volatility.