The Stock Market’s Reaction to Unanticipated Catastrophic Event

Abstract

Several factors influence the stock market; they trigger market over-or under-reactions. The paper aims to identify the effect of a major catastrophic event on stock returns. For this, daily data of stock market indices was used with a total of 210 observations and the effect of catastrophic event, Nepal Earthquake 2015, was tested using the method of event analysis for different event windows. The catastrophic event did not affect stock returns significantly and was resilient to earthquake-induced shocks. The event window (+2, +10) shows the higher and positive abnormal returns which depicts that the market has recovered from the shock in as many as three days. The study shows that stock market in Nepal is semi-strongly inefficient.

Nepalese Stock Market Volatility During Catastrophic Events (Covid-19)

“…Furthermore, the study found a strong negative correlation between the cumulative cases, volume, and index closing value in COVID-19's first year, which supports the findings of Hamal & Gautam (2021) and shows that the COVID-19 outbreak and government policy measures had a significant and negative impact on stock market volatility, return, and overall performance in the short term. However, there was a significant positive correlation for the second year of COVID-19, which partially aligns with the findings of Karki (2020) and Dangol (2008), which found that the Nepalese Stock Market was inefficient.…”

“…Gao et al (2021), Bora & Basistha (2021), and Chaudhary et al (2020) found that COVID-19 had a significant leverage on stock market volatility. However, research conducted in Nepal by Karki (2020), Dangol (2008), andHamal &Gautam (2021) has found that catastrophic events only have a shortterm effect on the volatility of NEPSE. Moreover, the only study on the impact of COVID-19 on stock volatility conducted by Hamal & Gautam (2021) used the Systematic Literature Review method without the use of the NEPSE data.…”

“…Large changes tend to be followed by large changes and small changes tend to be followed by small changes, which means that volatility clustering is observed in financial returns (G.C., 2009). But, data (Karki, 2020) showed that the Catastrophic event (2015 earthquake) had no robust effect on the stock market returns in the Nepalese stock market. However, in the case of the COVID-19 pandemic, the short-term impact of the COVID-19 outbreak and government policy measures had a significant and adverse impact on stock market volatility, return, and overall performance (Hamal & Gautam, 2021).…”

“…Along with the theory, it aims to identify the degree of market efficiency measured by the speed at which stock prices are adjusted for catastrophic events showing that in the context of Nepal, the Catastrophic event (the 2015 earthquake) had no robust effect on the stock market' returns in general. The unanticipated news had a significant negative impact on stock returns only for the event window (0, +10) and it has shown that the stock market in Nepal is semi-strongly inefficient (Karki, 2020). So, in the future to neutralize the impact of the catastrophic event arising it is crucial to identify the response of the stock market to different catastrophic events.…”

Capital Market Response to COVID-19 Pandemic – A Systematic Review on Stock Volatility and Performance

“…While the majority of countries depicted similar results, some countries like Pakistan did not experience a negative effect of the increase in confirmed cases and death cases but instead realized a positive effect of recovery rate on stock market (Ahmed, 2020). Such discrepancies in stock performance improvement despite the crisis period were explained by Karki (2020) by denoting the market as inefficient as such markets cannot explain investor sentiment or do not account for information in the environment.…”