Rational Behavior or Mere Panic? The Effects of the COVID-19 Pandemic on the Stock Markets

Moritz Johannes Herber and Matthias Scherf

Chapter 7 in Financial Transformations Beyond the COVID-19 Health Crisis, 2022, pp 199-227 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The negative effect of market sentiment on asset prices is well known in behavioral finance. In this study, we examine the effect of panic over the COVID-19 pandemic on the stock market. We find a significant negative effect of the panic caused by the pandemic on country indices of India, Italy, Germany, and the US, while for China and South Korea, we find no effect. To measure panic, we used data on COVID-19–related search results from Google, Naver, and Baidu. Controlling for cases and recoveries from COVID-19 showed that the panic over the pandemic had a greater impact on individual country indices than the pandemic itself.

Keywords: COVID19; Pandemic; Pandemic Outbreak; Health Crisis; Economics; Macroeconomics; Finance; Sustainable Finance; Financial Crisis; Financial Integration; Economic Integration; Global Financial Crisis; Financial Institutions; Corporate Finance; Corporate Governance; Board of Directors; ESG; Corporate Social Responsibility; Sustainable Finance; Stock Markets; Financial Markets; Stock Market Behaviour; Firm Liquidity; Emerging Markets; China; Financial Institutions; Money; Banks; Banking System; Banking Sector; Business Groups; Resilience; Safe Heaven; Gold; Oil; Peer-to-Peer Lending Market; Foreign Trading; Stock Market Volatility; Extreme Events (search for similar items in EconPapers)
JEL-codes: F4 F62 G15 G17 G3 O16 (search for similar items in EconPapers)
Date: 2022
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