Pakistan Stock Market Reactions to Covid-19: Moderating Effect of Government Intervention

Abstract

COVID-19, also known as coronavirus, is extremely contagious, and it spreads quickly. The Pakistani government has taken the necessary precautions to prevent the spread of COVID-19. This research investigates the moderating effect of government interventions on the association between stock returns and increasing confirmed cases. The Black Swan theory can be linked to this study. To investigate the effect of government intervention during the Covid-19 time on the Pakistan stock market, this study has employed a multivariate time-series analysis. The sample consists of 433 daily observations collected in Pakistan from 10th March 2020 to 13th December 2021. The exchange rate was taken as a control variable for this research. The findings have shown that government social distancing policies have a negative impact, whereas government containment, health response, and income assistance programs are likely to contribute to a positive market reaction by increasing investor confidence and lowering the disease’s negative economic impacts. Regression analysis shows that the SI has a negative relationship with stock return and containment and mitigation and economic support health index has positive relationship with stock return, but they have no effect on movement of return as they are insignificant. However, the results imply that COVID-19 confirmed cases and the exchange rate have a significant negative impact on the movement of the stock return. The findings have important policy implications because they show that government intervention policies have significant economic effects.