Stock market reactions to COVID-19 shocks: do financial market interventions walk the talk?

• Published in: China finance review international 2022-10, Vol.12 (4), p.623-645
• Main Authors: Marobhe, Mutaju Isaack, Kansheba, Jonathan Mukiza Peter
• Format: Article
• Language: English
• Subjects: Black swan event; COVID-19; Debt management; Ebola virus; Economic conditions; Economic crisis; Equity funds; Financial services; Hypotheses; International finance; Investments; Investors; Liquidity; Pandemics; Recessions; Securities markets; Short sales; Social distancing; Stock exchanges; Volatility
• ISSN: 2044-1398; 2044-1401
• DOI: 10.1108/CFRI-01-2022-0011

PurposeFollowing the COVID-19 outbreak, various economies imposed different financial interventions as part of initiatives to cushion their stock markets from deteriorating performance. Our article examines the effectiveness of these interventions in protecting stock markets during the pandemic.Design/methodology/approachThe authors employ Panel Vector Autoregression to model the magnitude and timing of shocks from COVID-19 to stock markets. The fixed effects regression is then utilized to assess the role of financial interventions in protecting stock markets during COVID-19. The study uses daily stock index returns as well COVID-19 containment measures stringency index data from 39 countries ranging from 2nd January 2020 to 30th September 2021.FindingsOur findings firstly reveal a significant positive stock market reaction to country-level containment measures stringency but only during the first wave of COVID-19. We secondly show that stock market functioning interventions that include short selling bans and circuit breakers amplify the positive effects of COVID-19 containment measures stringency on stock market performance.Research limitations/implicationsThe authors stress the need for policymakers and regulators to timely intervene in protecting economies and stock markets during crises such as COVID-19 in order to reduce panic among investors. Moreover, investors should adjust their portfolios by investing in stocks from countries that have proper financial market interventions in place.Originality/valueDespite growing body of literature on COVID-19 and stock market performance, there is limited evidence on the role of financial sector interventions to cushion stock markets during tumultuous conditions caused by the pandemic.