Pandemic or panic? A firm-level study on the psychological and industrial impacts of COVID-19 on the Chinese stock market

Qiuyun Wang and Lu Liu ()
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Qiuyun Wang: Southwestern University of Finance and Economics
Lu Liu: Southwestern University of Finance and Economics

Financial Innovation, 2022, vol. 8, issue 1, 1-38

Abstract: Abstract This study presents a thorough investigation of the relationship between the coronavirus disease 2019 (COVID-19) and daily stock price changes. We use several types of COVID-19 patients as indicators for exploring whether stock prices are significantly affected by COVID-19’s impact. In addition, using the Chinese stock market as an example, we are particularly interested in the psychological and industrial impacts of COVID-19 on the financial market. This study makes two contributions to the literature. First, from a theoretical perspective, it shows a novel quantitative relationship between the psychological response to the pandemic and stock prices. In addition, it depicts the mechanism of the shock to the stock market by pointing out the specific functional expression of the impulse reaction. To our knowledge, this is the first theoretical calculation of the impulse of a shock to the financial market. Second, this study empirically estimates the marginal effect of the COVID-19 pandemic on fluctuations in stock market returns. By controlling for stock fundamentals, this study also estimates diverse industrial responses to pandemic stock volatility. We confirm that the COVID-19 pandemic has caused panic in the stock market, which not only depresses stock prices but also inflates volatility in daily returns. Regarding the impulse of the shock, we identify the cumulative level of the pandemic variables as well as their incremental differences. As shown by our empirical results, the terms for these differences will eventually dominate the marginal effect, which confirms the fading impulse of the shock. Finally, this study highlights some important policy implications of stock market volatility and returns to work in the industry.

Keywords: Black swan event; COVID-19; Psychological and industrial impacts; Shocks; Stock market reaction (search for similar items in EconPapers)
JEL-codes: G14 H12 I18 O16 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (11)

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DOI: 10.1186/s40854-022-00335-8

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