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Stock market reactions under the shadow of the COVID-19 pandemic: Evidence from China

Author

Listed:
  • Zhou, Wenyu
  • Zhou, Yujun
  • Zaremba, Adam
  • Long, Huaigang

Abstract

This paper studies how the Chinese stock market reacts to new COVID-19 infections under the zero-COVID policy. Consistent with the literature, we find that a COVID-19 outbreak within a city adversely affects the performance of local firms, but further unveils the effect’s nonlinearity. More importantly, we document an unexpected pattern of spatial spillover of the COVID-19 shock, which is likely to be caused by the policy itself. In addition, firms with significant retail exposure are most vulnerable, while firms with low pandemic exposure, larger size, state-owned enterprise (SOE) status, and robust finances demonstrate greater resilience to the COVID-19 shock. Mechanism analysis indicates that the COVID-19 effects are realized through both cash flow and discount rate channels. Supplementary back-of-the-envelope calculations illustrate the substantial economic consequences of these phenomena, which shed light on the debate on the optimal policy in response to a future pandemic.

Suggested Citation

  • Zhou, Wenyu & Zhou, Yujun & Zaremba, Adam & Long, Huaigang, 2024. "Stock market reactions under the shadow of the COVID-19 pandemic: Evidence from China," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:beexfi:v:42:y:2024:i:c:s2214635024000388
    DOI: 10.1016/j.jbef.2024.100923
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    More about this item

    Keywords

    COVID-19; Zero-COVID policy; Chinese stock market; Stock returns; Spatial spillover;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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