COVID-19 and the Stock Markets: A Glance at the Initial Effects of the Pandemic

The COVID-19 pandemic and consequent economic lockdown have triggered unprecedented economic uncertainty. The financial markets responded instantly, pricing in the uncertainty boom. This paper assesses the impact of anti-COVID social distancing measures on stock markets across the globe. Analyzing 60 world economies in a panel vector autoregression framework, we find that the stringency of social distancing interventions has a negative effect on market returns, but its character is strictly transitory and it fades away within 7 days. The magnitude of the pandemic in terms of recorded disease cases and deaths reveal a very similar pattern, causing a significant, but short-lived decline of stock prices. Our estimates reveal a considerable asymmetry in the identified interrelationships. Less developed markets seem to respond to the economic lockdown more intensively than highly developed economies.