The Unprecedented Stock Market Reaction to COVID-19

Scott Baker, Nicholas Bloom, Steven Davis, Kyle Kost, Marco Sammon, Tasaneeya Viratyosin and Jeffrey Pontiff

The Review of Asset Pricing Studies, vol. 10, issue 4, 742-758

Abstract: No previous infectious disease outbreak, including the Spanish Flu, has affected the stock market as forcefully as the COVID-19 pandemic. In fact, previous pandemics left only mild traces on the U.S. stock market. We use text-based methods to develop these points with respect to large daily stock market moves back to 1900 and with respect to overall stock market volatility back to 1985. We also evaluate potential explanations for the unprecedented stock market reaction to the COVID-19 pandemic. The evidence we amass suggests that government restrictions on commercial activity and voluntary social distancing, operating with powerful effects in a service-oriented economy, are the main reasons the U.S. stock market reacted so much more forcefully to COVID-19 than to previous pandemics in 1918–1919, 1957–1958, and 1968.

JEL-codes: E44 E65 G12 G18 I18 (search for similar items in EconPapers)
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