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Modeling and analysis of the effect of COVID-19 on the stock price: V and L-shape recovery

Author

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  • Mahata, Ajit
  • Rai, Anish
  • Nurujjaman, Md.
  • Prakash, Om

Abstract

The emergence of the COVID-19 pandemic, a new and novel risk factor, leads to the stock price crash due to the investors’ rapid and synchronous sell-off. However, within a short period, the quality sectors start recovering from the bottom. A stock price model has been developed to capture the price dynamics during shock and recovery phases of such crisis. The main variable and parameter of the model are the net fund flow (Ψt) due to institutional investors, and financial antifragility (ϕ) of a company, respectively. We assume that during the crash, the stock price fall is independent of the ϕ. We study the effects of shock length (TS) and ϕ on the stock price during the crisis period using the Ψt obtained from both the synthetic fund flow data and real fund flow data. We observed that the possibility of recovery of stock with ϕ>0, termed as quality stock, decreases with an increase in TS beyond a specific period. A quality stock with higher ϕ shows V-shape recovery and outperform others. The TS and recovery period of quality stock are almost equal in the Indian market. Financially stressed stocks, i.e., the stocks with ϕ<0, show L-shape recovery during the pandemic. The stock data and model analysis show that the investors, in the uncertainty like COVID-19, invest in the quality stocks to restructure their portfolio to reduce the risk. The study may help the investors to make the right investment decision during a crisis.

Suggested Citation

  • Mahata, Ajit & Rai, Anish & Nurujjaman, Md. & Prakash, Om, 2021. "Modeling and analysis of the effect of COVID-19 on the stock price: V and L-shape recovery," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 574(C).
    • Handle: RePEc:eee:phsmap:v:574:y:2021:i:c:s0378437121002806
    DOI: 10.1016/j.physa.2021.126008
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    1. Munusamy Dharani & M. Kabir Hassan & Makeen Huda & Mohammad Zoynul Abedin, 2023. "Covid-19 pandemic and stock returns in India," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(1), pages 251-266, March.
    2. Rai, Anish & Mahata, Ajit & Nurujjaman, Md & Majhi, Sushovan & Debnath, Kanish, 2022. "A sentiment-based modeling and analysis of stock price during the COVID-19: U- and Swoosh-shaped recovery," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 592(C).

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