COVID-19 pandemic and capital markets: the role of government responses

Abstract

This paper analyzes the moderation effect of government responses on the impact of the COVID-19 pandemic, proxied by the daily growth in COVID-19 cases and deaths, on the capital market, i.e., the S&P 500 firm’s daily returns. Using the Oxford COVID-19 Government Response Tracker, we monitor 16 daily indicators for government actions across the fields of containment and closure, economic support, and health for 180 countries in the period from January 1, 2020 to March 15, 2021. We find that government responses mitigate the negative stock market impact and that investors’ sentiment is sensitive to a firm’s country-specific revenue exposure to COVID-19. Our findings indicate that the mitigation effect is stronger for firms that are highly exposed to COVID-19 on the sales side. In more detail, containment and closure policies and economic support mitigate negative stock market impacts, while health system policies support further declines. For firms with high revenue exposure to COVID-19, the mitigation effect is stronger for government economic support and health system initiatives. Containment and closure policies do not mitigate stock price declines due to growing COVID-19 case numbers. Our results hold even after estimating the spread of the pandemic with an epidemiological standard model, namely, the susceptible-infectious-recovered model.

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“…Nonetheless, a study by the authors in Chang et al (2021) found that stock returns had a positive effect on the government responses to COVID-19 (the "lockdown" policy). Beer et al (2023), indicating that the responses of governments mitigate the negative stockmarket effect, while the authors in Scherf et al (2022) found that lockdown restrictions led to different reactions; there was a negative impact resulting from the increase in lockdown restrictions, but under-reaction during the lockdown announcement and then followed by overreaction. The authors in Cervantes et al (2022) suggested that changes in panic indexes because of the COVID-19 crisis had no significant relationship with raw stock-market returns.…”

“…In addition, other studies at the global level suggested different results; studies by the authors in Liu et al (2020), Uddin et al (2021), and Zhang et al (2020) suggested stock returns were negatively impacted; the authors in Uddin et al (2021) also suggested that resilience scores could significantly reduce the volatility of developed and emerging equity markets. Nonetheless, a study by the authors inChang et al (2021) found that stock returns had a positive effect on the government responses to COVID-19 (the "lockdown" policy) Beer et al (2023),. indicating that the responses of governments mitigate the negative stockmarket effect, while the authors inScherf et al (2022) found that lockdown restrictions led to different reactions; there was a negative impact resulting from the increase in lockdown restrictions, but under-reaction during the lockdown announcement and then followed by overreaction.…”