The determinants of the COVID-19 related stock price overreaction and volatility

Yiyang Val Sun, Bin Liu and Tina Prodromou

Studies in Economics and Finance, 2021, vol. 39, issue 1, 125-149

Abstract: Purpose - This study aims to investigate which stock characteristics and corporate governance variables affect stock price overreaction and volatility during the COVID-19 pandemic period. Design/methodology/approach - A set of stock characteristics and corporate governance variables which may affect price overreaction and volatility were identified following a review of the literature. A dummy variable was created for the cross-sectional analysis to take into account the unique sector effect in the consumer staples sector. Out of sample analysis was conducted to confirm the robustness of the main results. Findings - The empirical results consistently show that size, dividend and trading volume determine the stock price reactions when the market is in turmoil during the pandemic period. Board size and average board tenure exhibit moderate effects on reducing the stock price reactions, but the effects become insignificant while controlling for the firm characteristics in the regressions. The results remain robust when tested out of the sample. More interestingly, a consumer staples sector effect is identified and tested. The test results show that the consumer staples sector effect mitigates the stock price reactions. Practical implications - The results have practical implications for investors who aim to manage desired levels of risk in their portfolios during the pandemic. The results also provide meaningful insights to stock market speculators regarding pandemic-related speculation opportunities. Originality/value - This study makes a meaningful connection between the irrational stock market anomalies and the COVID-19 pandemic.

Keywords: Stock dividend; COVID-19; Stock price volatility; Consumer staple sector effect; Price overreaction; Stock size effect; Irrational stock market anomalies; G01; G34 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-08-2021-0330

DOI: 10.1108/SEF-08-2021-0330

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