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Has COVID-19 Pandemic Fear Affected Eurozone Stock Markets?

Carmen González-Velasco () and Marcos González-Fernández
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Carmen González-Velasco: Universidad de León

Chapter Chapter 8 in Crises and Uncertainty in the Economy, 2022, pp 143-158 from Springer

Abstract: Abstract The aim of this paper is to analyze the impact of COVID-19 pandemic fear, proxied by Google search volume of the keyword coronavirus, on the stock markets of four Eurozone countries more affected by the pandemic crisis. It is based on the fact that investors are not rational and make their decisions influenced by their sentiments (including fear), through the noise trading channel, which leads to greater volatility and greater mispricing in stock markets, and herding behavior during COVID-19 pandemic crisis as investors lose confidence when they receive negative information, which leads them to overestimate investment risks and consequently to decline the stock prices. We perform VAR models along with Granger causality tests and Impulse Response Functions since these are the adequate methodologies for the aim of the paper considering the frequency of the data and the length of the sample. Our results indicate that COVID-19 pandemic fear causes changes in stock market returns for Germany, Italy, and Spain. We find that an increase in fear leads to a significant plunge in the stock market the following days. These findings have several implications for policymakers and investors.

Keywords: Coronavirus; COVID-19 pandemic; Google trends; Fear; Investor sentiment; Stock markets; G10; G15; G17 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-981-19-3296-0_8

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