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

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  • Harjoto, Maretno Agus
  • Rossi, Fabrizio
  • Lee, Robert
  • Sergi, Bruno S.

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.

Suggested Citation

  • Harjoto, Maretno Agus & Rossi, Fabrizio & Lee, Robert & Sergi, Bruno S., 2021. "How do equity markets react to COVID-19? Evidence from emerging and developed countries," Journal of Economics and Business, Elsevier, vol. 115(C).
    • Handle: RePEc:eee:jebusi:v:115:y:2021:i:c:s0148619520304100
    DOI: 10.1016/j.jeconbus.2020.105966
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    More about this item

    Keywords

    COVID-19; Stock return; Volatility; Trading volume; Daily cases and deaths; Emerging and developed countries;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • I10 - Health, Education, and Welfare - - Health - - - General

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