Market reaction to the COVID-19 pandemic: evidence from emerging markets
International Journal of Emerging Markets
Article publication date: 12 April 2021
Issue publication date: 2 January 2023
This study examines the market reaction to the World Health Organization (WHO) announcement of the novel coronavirus disease 2019 (COVID-19) as a global pandemic on the emerging equity markets and compares the reaction with developed markets. This study also compares the market reactions to the COVID-19 pandemic with the market reactions to the 2008 global financial crisis.
Using the Morgan Stanley Capital International daily stock indices data and the Carhart and the GARCH(1,1) models for an event study, the authors examine the cumulative abnormal returns during 30 and 10 trading days and the extended 60 days before and after the WHO pandemic announcement. It also compares the market reactions during the COVID-19 pandemic with the reactions to the Lehman Brothers' bankruptcy announcement during the 2008 global financial crisis.
This study finds that the COVID-19 pandemic had a significantly greater negative impact to the stock markets in emerging countries than in the developed countries. The negative impact on the emerging markets is more pronounced for firms with small market capitalizations and for growth stocks. The negative impact of the COVID-19 pandemic is stronger in the energy and financial sectors in both emerging and developed markets. The positive impact of the COVID-19 pandemic occurred in healthcare and telecommunications for the emerging markets and information technology for the developed markets. This study also finds that the equity markets in both emerging and developed countries recovered faster from the COVID-19 pandemic relative to the 2008 global financial crisis.
Investors' desire to diversify their risks across different countries and sectors in the emerging markets could bring superior returns. The diversification strategies bring critical financial supports to forestall the contagion of COVID-19, to protect lives, and to save the emerging economies, especially for those financially constrained countries that are facing twin health and economic shocks by channeling their investments to countries with weak healthcare systems.
This study extends the literature that examines market reactions to stock market shocks by examining the market reactions to the COVID-19 outbreak on the emerging and developed equity markets across different market capitalizations, valuation and sectors. This study also finds that the markets recovered quicker from the COVID-19 pandemic announcement than during the 2008 global financial crisis.
The authors would like to thank the Editor-in-Chief Ilan Alon and three anonymous reviewers for their valuable constructive comments and recommendations. Harjoto acknowledges the financial support and release time from the 2019–2021 Denney Academic Chair Endowment at Pepperdine Graziadio Business School for financial support and release time for this research project and the support from Vance Ito, John Paglia and Clemens Kownatzki. The authors acknowledge Victor Tsao and the Tsao Family Foundation for their financial support for the Bloomberg terminal at the Pepperdine Graziadio Business School that allows us to conduct this research. Tsao Family Foundation financial support for the Bloomberg terminal at the Pepperdine Graziadio Business School has generated groundbreaking research on COVID-19. The authors declare that they have no conflict of interest.
Harjoto, M.A. and Rossi, F. (2023), "Market reaction to the COVID-19 pandemic: evidence from emerging markets", International Journal of Emerging Markets, Vol. 18 No. 1, pp. 173-199. https://doi.org/10.1108/IJOEM-05-2020-0545
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