Stock Markets Reaction to COVID-19: Evidence from Time-Varying Cointegration, Leveraged Bootstrap Causality and Event Analysis

Chien-Chiang Lee (), Godwin Olasehinde-Williams and Ifedola Olanipekun
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Ifedola Olanipekun: Adeyemi College of Education, Ondo, Nigeria

Czech Journal of Economics and Finance (Finance a uver), 2022, vol. 72, issue 4, 328-355

Abstract: This paper examined the interconnectedness of COVID-19 and stock markets in some of the most affected countries—USA, Italy, Spain and Germany. To this end, a time-varying cointegration technique was first employed to examine for the presence of comovements between daily infections and stock market changes. A time-varying wild bootstrap likelihood ratio test was then employed to determine whether COVID-19 is a significant predictor of stock market performance. Lastly, an event study analysis was conducted to investigate the short-term effect of the outbreak on stock market returns. Findings revealed the existence of comovements between COVID-19 infections and stock price indices in all the selected countries. The rejection of the null hypothesis of no predictability was also recorded in all of the countries sampled. The event study analysis revealed that significant negative cumulative abnormal returns were predominant in all the countries. The reactions of the stock markets of the three European Union member countries included in the study to the pandemic are quite similar, suggesting that countries that are regionally and economically integrated are likely to experience relatively similar effects. The USA stock market was the most resilient to the impact of the outbreak.

Keywords: COVID-19; stock market indices; time-varying cointegration test; wild bootstrap likelihood ratio test; abnormal returns (search for similar items in EconPapers)
JEL-codes: C22 F36 I15 I18 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:72:y:2022:i:4:p:328-355

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