The Impact of Pandemic Shocks to the Stock Market

University essay from Lunds universitet/Företagsekonomiska institutionen

Abstract: The outbreak of the COVID-19 pandemic in November 2019, has made a huge impact on the stock market. Thus, this paper aims to analyze how big of an impact the pandemic shocks have compared to other known shocks on the market. The study focuses on financial services companies due to the limited work that views the effect of pandemic driven shocks on this sector. The study conducted two samples of data. One sample consisted of thirty financial services companies in North America that were active from 1st August 2002 to 8th May 2020. Meanwhile, the second sample examined the volatility of thirty blue-chip companies from diverse sectors recorded in the Dow Jones Industrial Average index. Firstly, the effect of the COVID-19 shock on the market volatility of the financial services sector was examined.Secondly, a comparison of the magnitudes of the effect on the other known shocks was performed. Lastly, a comparison between the financial services sector and the diverse sectors was conducted. A classical ARCH (1,1) model and a GARCH (1,1) model were implemented to assess market volatility, and a TGARCH (1,1) model was executed to estimate its asymmetrical effects of positive and negative returns. The main findings indicate that the financial services sector responds less severely to pandemic shocks compared to other known shocks on the market. Furthermore, the results indicate that the leverage effect is not observed during pandemic outbreaks.

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