Systematic COVID risk, idiosyncratic COVID risk and stock returns

Xiaoyuan Wan and Jiachen Zhang

The North American Journal of Economics and Finance, 2024, vol. 69, issue PA

Abstract: This paper proposes an event-based approach to estimate the systematic and idiosyncratic COVID risk for individual stocks. The systematic COVID risk is based on the excess co-variance between stock returns and market returns during the event window when the COVID shock occurred. The idiosyncratic COVID risk is based on the excess idiosyncratic volatility during the event window. The approach also allows us to estimate abnormal returns associated with COVID shock for individual stocks. Moreover, we apply the event-based approach to separately estimate the risks associated with domestic COVID shock and foreign COVID shock. Based on the estimates of COVID risk and abnormal COVID returns, we examine their relations with future stock returns. Our results show that both systematic domestic and foreign COVID risks are positively related to future stock returns, suggesting that investors demand higher expected returns for stocks with high exposure to the COVID shock. We also find a negative relation between abnormal returns associated with domestic COVID and future stock returns and the relation becomes stronger over longer horizon, indicating initial overreaction to COVID shock. We perform various robustness checks to confirm our main findings. Our findings have important implications on risk management for investors, firms, and regulators.

Keywords: COVID shock; Systematic COVID risk; Idiosyncratic COVID risk; Expected stock returns (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940823001274
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:69:y:2024:i:pa:s1062940823001274

DOI: 10.1016/j.najef.2023.102004

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().