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Investor sentiment and government policy interventions: evidence from COVID-19 spread

Garima Goel (Department of Finance and Accounting, Indian Institute of Management Indore, Indore, India)
Saumya Ranjan Dash (Department of Finance and Accounting, Indian Institute of Management Indore, Indore, India)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 26 June 2021

Issue publication date: 16 February 2022

650

Abstract

Purpose

This paper aims to investigate the moderating role of government policy interventions amid the early spread of novel coronavirus (COVID-19) (January–May 2020) on the investor sentiment and stock returns relationship.

Design/methodology/approach

This paper uses panel data from a sample of 53 countries to examine the impact of investor sentiment, measured by the financial and economic attitudes revealed by the search (FEARS) index (Da et al., 2015) on the stock return.

Findings

The moderating role of government policy response indices with the FEARS index on the global stock returns is further explored. This paper finds that government policy responses have a moderating role in the sentiment and stock returns relationship. The effect holds true even when countries are split based on five classifications, i.e. cultural distance, health standard, government effectiveness, social well-being and financial development. The results are robust to an alternative measure of pandemic search intensity, quantile regression and two measures of stock market activity, i.e. conditional volatility and exchange traded fund returns.

Research limitations/implications

The sample period of this study encompasses the early spread phase (January–May 2020) of the novel COVID-19 spread.

Originality/value

This paper provides some early evidence on whether the government policy interventions are helpful to mitigate the impact of investor sentiment on the stock market. The paper also helps to shed better insights on the role of different country characteristics for the sentiment and stock return relationship.

Keywords

Acknowledgements

Authors are thankful to Dr James Barth, the editor of Journal of Financial Economic Policy and referees for their insightful comments which guided us to improve the article. Authors specially thank the “Covid-19 track” participants and reviewers of Doctoral Colloquium in Management and Development (DOCMAD - 2020) organized by Institute of Rural Management Anand (IRMA), India for their helpful comments. All remaining errors are theirs.

Citation

Goel, G. and Dash, S.R. (2022), "Investor sentiment and government policy interventions: evidence from COVID-19 spread", Journal of Financial Economic Policy, Vol. 14 No. 2, pp. 242-267. https://doi.org/10.1108/JFEP-02-2021-0038

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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