Pandemic or panic? A firm-level study on the psychological and industrial impacts of COVID-19 on the Chinese stock market

Abstract

This study presents a thorough investigation of the relationship between the coronavirus disease 2019 (COVID-19) and daily stock price changes. We use several types of COVID-19 patients as indicators for exploring whether stock prices are significantly affected by COVID-19’s impact. In addition, using the Chinese stock market as an example, we are particularly interested in the psychological and industrial impacts of COVID-19 on the financial market. This study makes two contributions to the literature. First, from a theoretical perspective, it shows a novel quantitative relationship between the psychological response to the pandemic and stock prices. In addition, it depicts the mechanism of the shock to the stock market by pointing out the specific functional expression of the impulse reaction. To our knowledge, this is the first theoretical calculation of the impulse of a shock to the financial market. Second, this study empirically estimates the marginal effect of the COVID-19 pandemic on fluctuations in stock market returns. By controlling for stock fundamentals, this study also estimates diverse industrial responses to pandemic stock volatility. We confirm that the COVID-19 pandemic has caused panic in the stock market, which not only depresses stock prices but also inflates volatility in daily returns. Regarding the impulse of the shock, we identify the cumulative level of the pandemic variables as well as their incremental differences. As shown by our empirical results, the terms for these differences will eventually dominate the marginal effect, which confirms the fading impulse of the shock. Finally, this study highlights some important policy implications of stock market volatility and returns to work in the industry.

Industry return lead-lag relationships between the US and other major countries

“…Further, there is some evidence that it decreased market informational efficiency, especially in the US and the UK (Ozkan 2021 ; Junior et al 2021 ). More importantly, using data from the Chinese stock market, Wang and Liu ( 2022 ) show that the shocks from the COVID-19 pandemic to the market was heterogeneous across industries, and the panic caused by the pandemic expanded volatility in daily returns. However, they note that the impulse of the shock from the pandemic tended to fade over time.…”

Urban housing prices within a core urban agglomeration in China

“…Further, we can conduct more in-depth research and analysis with spatial econometric models. Now facing the shocks of COVID-19 (Wang and Liu 2022 ; Liu et al 2022 ), the development of the housing market in China become more diverse. Therefore, the method and basic results shown in this study are still useful in future studies.…”

Stock market reaction to government policy on determining coal selling price

“…On short-selling, irrational investors will tend to make transactions, while their pessimistic investors buy stocks that fall in the hope of higher returns after the pandemic. The results of a study conducted by Wang & Liu [ 36 ] on the Chinese stock market showed that the COVID-19 pandemic caused panic in the stock market, which suppressed stock prices and increased volatility in daily returns.…”