1
COVID-19: A pandemic for financial markets?
Folkert te Velde S3142426
Executive Summary
The COVID-19 pandemic is the reason why 2020 will be remembered for years to come. The virus originated on a local wildlife market in Wuhan City, the capital of the Chinese province Hubei, on the 31st of December 2019. The infectious nature of the disease caused it to spread between humans very quickly. Three months after its origin, the virus was declared a pandemic by the World Health Organisation (WHO, 2020). In order to contain the disease, national governments instated lockdowns, curfews, quarantines, travel restrictions and other poignant measures. These measures have a significant impact on the lives of humans, the world economy and financial markets.
Previous literature has found that diseases, such as Ebola and SARS, impact financial markets. In this study, we analysed whether the COVID-19 pandemic significantly affected stock returns in the Netherlands. The impact of COVID-19 on financial markets comes from two main sources. Firstly, COVID-19 has a large economic impact. The aforementioned measures affect many different economic sectors and cause a general slowdown of the economy. Secondly, investor sentiment is negatively affected by fear and pessimism caused by the pandemic. This negative investor sentiment can lead to overly negative valuations in financial markets.
2 The societal relevance of this study originates from two sources. Firstly, we contribute to the already existing literature regarding the relation between diseases and financial markets. This study contributes to the literature in several ways. To the best of our knowledge, this is the first study that analyses the impact of COVID-19 on Dutch financial markets. Furthermore, this is the first paper that studies the moderating effect of national press conferences on stock returns. Secondly, this paper could help financial agents in making better informed decisions when another disease or disaster occurs.
In the study, we used a sample of the 75 largest publicly listed firms on the Euronext Amsterdam over the period of 1 January 2020 until 21 August 2020. The sample contains firms listed on the Amsterdam Exchange Index (AEX), the Amsterdam Midcap Index (AMX) and the Amsterdam Small-Cap Index (ASCX). Firm-level data of stock prices, daily market capitalization and price-to-book ratio’s were gathered from Thomson Reuters’ Eikon. The particular methodology that is used in the study is a panel data regression. To study the impact of COVID-19, we used either the daily growth in total new confirmed Dutch COVID-19 cases or the daily growth in total new confirmed Dutch COVID-19 deaths in the regression.
After running the regressions, we obtained a number of results. Firstly, we found that stock returns were significantly negatively affected by the growth in daily new COVID-19 cases. However, the impact of daily new COVID-19 deaths was insignificant. Hence, we conclude that investors of Dutch stocks react negatively to new COVID-19 cases and weakly to new COVID-19 deaths. Secondly, we reported that the stock returns during the COVID-19 period depended on firm size. We found that the largest firms in the sample (firms on the AEX) performed the worst, while small firms performed the best. Thirdly, we observed that the impact of COVID-19 was different when firms were categorized in economic sectors. We found that the Basic Materials, Capital Goods, Consumer-Non/Cyclical and Technology sectors performed better than the market, whereas the Energy, Financial, Healthcare and Services sectors performed significantly worse than the market. Fourthly, we observed that the COVID-19 related press conferences had a significant negative effect on stock returns. In particular, when we distinguished between good and bad press conferences, we found that investors reacted negatively to bad press conferences and weakly to good press conferences. Lastly, as a robustness test, we split the sample in the first and second COVID-19 wave. We reported that stock returns were significantly negatively affected by COVID-19 in the first wave. However, in the second wave, stock returns were not significantly affected by COVID-19.
4
References
Ashraf, B. N. (2020). Stock markets’ reaction to COVID-19: cases or fatalities?. Research in International Business and Finance, 101249.
