This paper investigates the impact of coronavirus disease 2019 (COVID‐19) on the Chinese stock market. We show that the COVID‐19 outbreak not only hurts the stock returns but also affects the stock price sensitivity to firm‐specific information. We document heterogeneous effects of the epidemic infection scale and the public attention about the pandemic. The stock market response to firm‐specific information is decelerated (accelerated) by the public attention (infection scale). Moreover, the decreasing (increasing) effect of the public attention (infection scale) on such response is more intensive to positively toned (negatively toned) firm‐specific news articles. Finally, we observe price reversal (momentum) following the public attention (infection scale).
Studying 70 Chinese equity exchange-traded funds (ETFs), we show that daily ETF flows significantly increase both the total volatility and the fundamental volatility of the underlying index on the next trading day. More specifically, it is the forward-looking flow component which captures APs' share creation/ redemption activities beyond their role of market makers that can significantly predict the two types of volatility. Moreover, ETF arbitrage (ETF's information share) enhances the effect of forward-looking flows on the total volatility (fundamental volatility) of the index. Furthermore, the relationships between forward-looking flows and the two types of index volatility show a two-way contagion.
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