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How do equity markets react to COVID-19? Evidence from emerging and developed countries

Maretno Agus Harjoto, Fabrizio Rossi, Robert Lee and Bruno S. Sergi

Journal of Economics and Business, 2021, vol. 115, issue C

Abstract: Based on the supply of stock market returns hypothesis, we argue that the unprecedented adverse shock of COVID-19 on the countries’ economic growth translates into a negative shock to the stock markets. According to the institutional theory, we also argue that the impact of COVID-19 in emerging countries is different from developed countries. Based on the overreaction hypothesis, we expect that the market reaction during the stabilizing period of COVID-19 spread is different from the market reaction during the infection period. Using high-frequency daily data across 53 emerging and 23 developed countries from January 14 to August 20, 2020, we find that COVID-19 cases and deaths adversely affect stock returns and increase volatility and trading volume. Cases and deaths affected stock returns and volatility in the emerging markets, while only cases of COVID-19 affected stock returns, volatility, and trading volume in the developed markets. COVID-19 cases and deaths are related to returns, volatility, and trading volume for emerging countries during the rising infection of COVID-19 (pre-April 2020), while cases and mortality rates are related to returns, volatility, and trading volume in developed countries during the stabilizing spread (post-April 2020). Therefore, the emerging markets’ investors seem to react to COVID-19 cases and mortality rates differently from those in the developed markets across two different periods of COVID-19 infection.

Keywords: COVID-19; Stock return; Volatility; Trading volume; Daily cases and deaths; Emerging and developed countries (search for similar items in EconPapers)
JEL-codes: G01 G14 G15 I10 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jeconbus.2020.105966

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