DP14511 Feverish Stock Price Reactions to COVID-19

Author(s): Stefano Ramelli, Alexander F Wagner
Publication Date: March 2020
Date Revised: April 2020
Keyword(s): behavioral finance, Coronavirus, Corporate Debt, COVID-19, event study, global value chains, Neglected risks, Pandemic, SARS-CoV-2, Supply Chains
JEL(s): F15, F23, F36, G01, G02, G14, G15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14511

The 2019 novel Coronavirus disease (COVID-19) pandemic led to extremely negative and volatile aggregate market reactions. The cross-section of stock price reactions provides insights into how investors responded to the outbreak. Sophisticated investors appear to have started pricing in some effects of the virus already in the first part of January (the "Incubation" phase). Broad attention of analysts, investors, and managers grew swiftly after human-human transmission of the virus was confirmed on January 20, 2020. The "Outbreak" phase followed, during which China-oriented stocks and internationally-oriented stocks more generally underperformed even as the aggregate market remained fairly stable. From the last week of February onwards, the "Fever" phase began. The aggregate market fell strongly in a whipsaw pattern. But behind these feverish price moves, the cross-section of returns reveals clear patterns. In particular, investors (and analysts) became increasingly worried about corporate debt and liquidity. Overall, the results suggest that the health crisis morphed into an economic crisis amplified through financial channels.