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Hang in There: Stock Market Reactions to Withdrawals of COVID-19 Stimulus Measures

Author

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  • Mr. Jorge A Chan-Lau
  • Mr. Yunhui Zhao

Abstract

The COVID-19 pandemic prompted unprecedented economic stimulus worldwide. We empirically examine the impact of a withdrawal of fiscal stimulus policies on the stock markets. After constructing a database of withdrawal events, we use event study analysis and cross-country regressions to assess the difference between the pre- and post-event stock price returns. We find that markets react negatively to premature withdrawals—defined as withdrawals at a time when the daily COVID cases are high relative to their historical average—likely reflecting concerns about the withdrawal impact on the prospects for economic recovery. The design of a successful exit strategy from COVID-19 policy responses should account for these concerns.

Suggested Citation

  • Mr. Jorge A Chan-Lau & Mr. Yunhui Zhao, 2020. "Hang in There: Stock Market Reactions to Withdrawals of COVID-19 Stimulus Measures," IMF Working Papers 2020/285, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/285
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    Cited by:

    1. Keiichi Morimoto & Shiba Suzuki, 2022. "Ambiguity in a pandemic recession, asset prices, and lockdown policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(5), pages 1039-1070, October.
    2. Richard C. K. Burdekin & Samuel Harrison, 2021. "Relative Stock Market Performance during the Coronavirus Pandemic: Virus vs. Policy Effects in 80 Countries," JRFM, MDPI, vol. 14(4), pages 1-18, April.

    More about this item

    Keywords

    stock prices; event study; exit strategy; COVID-19;
    All these keywords.

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