The impact of COVID-19 and the stringency of government policy responses on stock market returns worldwide

Purpose - This paper aims to investigate the impact of COVID-19 and the stringency of the government policy response on stock market returns globally and at the regional level. Design/methodology/approach - Pooled-ordinary least squares (OLS) and panel data techniques are used to analyse the daily data set across 88 countries in the Americas, Europe, Asia-Pacific, Middle East and Africa for the period of 1 January 2020 to 10 May 2021. Findings - Using pooled-OLS and panel data techniques, the analyses show that both the daily growth in confirmed cases and deaths caused by COVID-19 have significant negative effects on stock returns across all markets. The effects are non-linear and U-shaped. Stock markets react more to the growth of confirmed cases than to the growth in the number of confirmed deaths. The results, however, vary across regions. More specifically, this study finds that the negative effect of confirmed cases is stronger in the Americas and the Middle East, followed by Europe. The negative direct effect of deaths caused by COVID-19 is stronger in the European region, followed by the Middle East, in relation to the rest of the world. The stock market returns in the African region are not, however, statistically significant. The researcher finds evidence that stringent policy responses lead to a significant increase in the stock market returns, both globally and across regions. Practical implications - The results suggest that the integrity of the government and its interventions complemented by a stable and reliable monetary policy are crucial in providing confidence to firms and households in uncertain times. Originality/value - COVID-19 has a significant impact on national economies and stock markets, triggering various governments’ interventions across all geographic regions. The pandemic has significantly affected all aspects of life, especially the stock markets. However, their empirical impact on stock returns is still unclear. This paper is the first of its kind to fill this gap by providing an in-depth quantitative analysis of the impact of both COVID-19 and stringency of the governmental policy responses on stock market returns globally and at the regional level. It is also the first to use an advanced analytical framework in analysing the effects of daily growth in both total and newly confirmed cases, and the daily growth in both total and new deaths caused by COVID-19 on them. The dynamic nature of the data on COVID-19 is taken into account. The non-linearity of the effects is also considered.