World equity markets and COVID-19: Immediate response and recovery prospects

Following the spread of the COVID-19 pandemic, most global equity market indices experienced significant falls. Recognizing the severe economic impacts of the pandemic, starting from mid-March, many governments announced unprecedented economic rescue packages, which appear to restore investors’ confidence, given the recoveries recorded in most stock markets. However, the recovery performance significantly varies across countries. This paper provides an empirical analysis on what may explain this variation in the recovery performance observed in equity markets across countries. We find that among different types, fiscal stimulus supports seem to be strongly and positively associated with higher recovery that may justify more targeted fiscal supports for the real sector firms to restore investors’ confidence. We also find that the severity of the outbreak, reliance more on natural resource and tourism revenues are negatively associated with countries’ stock market recovery performance.     

COVID-19, government interventions and emerging capital markets performance

In this study, we explore the impact of government intervention to contain the spread of COVID-19 in emerging countries on the performance of their leading stock indices. We retrieved data on the performance of 25 international capital market indices included in the MSCI Emerging Markets Index and data about the closures, economic, and health measures imposed in each country examined. Overall, our findings show that government restrictions are associated with negative market returns, possibly due to the anticipated adverse effect to the economy. The adverse effect is more evident when closures are imposed. The market response to economic stimulus is mild but varies depending on the type of intervention imposed, much as with the health measures. Public campaigns may raise public awareness about COVID-19, but they can also increase the public’s fear of the pandemic, reflected in the negative response in capital markets. The results are essential for understanding the trends and fluctuations in emerging markets during this current crisis and for preparing for crises in the future.     

Comparing COVID-19 with the GFC: A shockwave analysis of currency markets

I analyze the shockwave effect of the COVID-19 pandemic on currency markets, with a comparison to the global financial crisis (GFC), employing Kapetanios m-break unit root test, investigations of standalone risk measures—downside variance, upside risk, volatility skewness, Gaussian Value at Risk (VaR), historical VaR, modified VaR—and Diebold–Yilmaz volatility spillover analysis. Standalone risk analysis shows that the turmoil in the initial months of COVID-19 was not as severe as that in the GFC. However, examination of co-movements and volatility spillovers illustrates a different scenario. According to the results of the static connectedness measure of Diebold–Yilmaz, the shockwave of the COVID-19 pandemic in the total volatility spillover is about eight times greater than that of the GFC. Among standalone risk measures, the results closest to this finding are obtained from volatility skewness analysis. Additionally, of six foreign exchange rates, the Brazilian real and Turkish lira are the currencies experiencing the greatest increase in received volatility during the GFC and the COVID-19 pandemic, respectively. These findings suggest the severe effect of crises on emerging financial markets.     

Vulnerability of financial markets in India: The contagious effect of COVID-19

This study aims to examine the impact of COVID-19 on financial markets, using emerging market data. Specifically, panel data regression is applied on 3200 observations for daily market returns during lockdown in India. The event study methodology is adopted to show abnormal returns registered in the lockdown period. A contrasting breakdown effect of COVID-19 on various Indian industries has been observed through sectoral analysis. The study also provides empirical evidence for lockdown measures taken by the government on stock market returns and post lockdown impact of COVID-19 on daily market returns for over 6550 observations.     

Venture capital investment and institutional factors: Evidence from China

This paper examines how venture capital (VC) investment and institutional factors affect the performance of VC-backed companies in China. Compared with non-VC-backed companies, we find that VC-backed companies slightly underperform in profitability but have considerably higher market value. Furthermore, VC investment does not help companies mitigate the negative impact of institutional factors on profitability; however, it conveys beneficial effects that help companies moderate the negative impact on market value. We also provide evidence that the impact of VC investment and institutional factors is more pronounced for non-state-owned companies, companies with poor corporate governance, and companies with higher research and development investment.     

COVID-19 and stock returns: Evidence from the Markov switching dependence approach

This paper aims to investigate the regime-switching and time-varying dependence between the COVID-19 pandemic and the US stock markets using a Markov-switching framework. It makes two contributions to the empirical literature by showing that: (a) the variations of the daily reported COVID-19 cases and cumulative COVID-19 deaths induced asymmetric lower (left) and upper (right) tail dependence with the stock markets, and its left and right tail dependence exhibited significant time-varying trends; and (b) the left and right tail dependence between the stock markets and the pandemic exhibited significant regime-switching behaviours, with its switching probabilities in the higher tail dependence stage all being greater than in the lower tail dependence stage after 1 December 2019. Moreover, given that there is concurrent but significant financial market reaction to any unexpected emergence of a transmittable respirational disease or a natural calamity, the outcomes have some vital implications to market players and policymakers.     

Product line transformation,foreign sales,and firm value: Evidence from COVID-19 pandemic governance in urban China

Using a sample of Chinese firms, we examine stock market reaction to firms that announce a change in their product lines to those related to COVID-19 management (medical masks and ventilators, among others). We find the market reacts positively to the announcements. In addition, when a firm ordinarily has a large share of export sales, the stock market reaction is more salient, indicating that export sales provide a certification effect that positively signals investors. Additional analysis on moderating effects suggest that, conditional on foreign sales, prior experience with medical product lines or less uncertainty about supply availability enhances the cumulative announcement returns (CARs), while the adverse impact of firm size on CAR magnifies.     

Information demand during the COVID-19 pandemic

We investigate the demand for financial information during the initial months of the COVID-19 pandemic. Using Google search data for individual stocks, we show that the Abnormal Google Search Volume Index declined significantly between March and June of 2020. We find a similar effect around earnings announcements dates, which confirms that the demand for financial information by retail investors declined during the pandemic. Our results are indicative of potentially important consequences for information diffusion, price discovery and market efficiency under extreme uncertainty. We discuss possible explanations for these results.     

Beyond internal capital markets: The in-house transmission of adverse sales shocks and the collateral channel

We study how shocks to some business segments affect investment in a firm's non-shock segments. We find that subsequent investment in the non-shock segments is significantly lower compared to segments of firms that do not experience shocks. Surprisingly, lower availability of internal funds does not account for the lower investment. We find that segment shocks propagate within the firm by decreasing the value of collateral assets and reducing the availability of external finance. Our results support the operation of an external finance collateral channel ([Kiyotaki, N., Moore, J., 1997. Credit cycles. Journal of Political Economy 105, 211–248.]) previously discussed in the literature.     

The internal capital markets of business groups: Evidence from intra-group loans

We study business groups? internal capital markets using a unique data set on intra-group lending in Chile (1990–2009). In line with groups? financing advantage, firms that borrow internally have higher investment, leverage, and return on equity (ROE) than other firms. At the margin, controlling shareholders have higher cash-flow rights in borrowing firms than in lending firms. However, there is no robust evidence of minority shareholders losing out from intra-group loans as tunneling predicts. Our evidence is consistent with the idea that strict regulation and disclosure requirements for intra-group loans, which are features of the Chilean market, reduce the risk of expropriation in pyramids.     

Disappearing internal capital markets: Evidence from diversified business groups in Korea

This paper examines how the onset of a financial crisis affects the operation of internal capital markets among firms within a diversified business group. We find that active internal capital markets within Korean business groups (chaebols) attenuate the financial constraints of the group-affiliated firms, allowing them to make efficient capital allocations during the early 1990s. However, these markets barely function after the financial crisis of 1997. Instead, we observe public debt markets serving as a substitute for internal capital markets. Our results suggest that chaebol firms’ coordinated attempts to achieve healthier financial structures in the wake of the crisis have taken place at the expense of investment efficiency.     

Internal capital market subsidies and industry downturns

We examine whether multisegment firms tend to subsidize operations doing business in industries that experience a major downturn in investment opportunities. The results provide little evidence of subsidization. The likelihood of discontinuation of multisegment operations in these industries does not statistically differ from that of single-segment operations. Similarly, patterns of capital expenditures after the shock do not materially deviate between multisegment and single-segment operations. These results indicate that the internal capital markets of multisegment firms are no less (and no more) efficient than that of single-segment firms in their reaction to a shock to investment opportunities.     

Gold and US sectoral stocks during COVID-19 pandemic

In this study, we examine the hedging relationship between gold and US sectoral stocks during the COVID-19 pandemic. We employ a multivariate volatility framework, which accounts for salient features of the series in the computation of optimal weights and optimal hedging ratios. We find evidence of hedging effectiveness between gold and sectoral stocks, albeit with lower performance, during the pandemic. Overall, including gold in a stock portfolio could provide a valuable asset class that can improve the risk-adjusted performance of stocks during the COVID-19 pandemic. In addition, we find that the estimated portfolio weights and hedge ratios are sensitive to structural breaks, and ignoring the breaks can lead to overestimation of the hedging effectiveness of gold for US sectoral stocks. Since the analysis involves sectoral stock data, we believe that any investor in the US stock market that seeks to maximize risk-adjusted returns is likely to find the results useful when making investment decisions during the pandemic.     

Machine learning sentiment analysis,COVID-19 news and stock market reactions

The recent COVID-19 pandemic represents an unprecedented worldwide event to study the influence of related news on the financial markets, especially during the early stage of the pandemic when information on the new threat came rapidly and was complex for investors to process. In this paper, we investigate whether the flow of news on COVID-19 had an impact on forming market expectations. We analyze 203,886 online articles dealing with COVID-19 and published on three news platforms (MarketWatch.com, NYTimes.com, and Reuters.com) in the period from January to June 2020. Using machine learning techniques, we extract the news sentiment through a financial market-adapted BERT model that enables recognizing the context of each word in a given item. Our results show that there is a statistically significant and positive relationship between sentiment scores and S&P 500 market. Furthermore, we provide evidence that sentiment components and news categories on NYTimes.com were differently related to market returns.     

From COVID-19 herd immunity to investor herding in international stock markets: The role of government and regulatory restrictions

We study if government response to the novel coronavirus COVID-19 pandemic can mitigate investor herding behaviour in international stock markets. Our empirical analysis is informed by daily stock market data from 72 countries from both developed and emerging economies in the first quarter of 2020. The government response to the COVID-19 outbreak is measured by means of the Oxford COVID-19 Government Response Tracker, where higher scores are associated with greater stringency. Three main findings are in order. First, results show evidence of investor herding in international stock markets. Second, we document that the Oxford Government Response Stringency Index mitigates investor herding behaviour, by way of reducing multidimensional uncertainty. Third, short-selling restrictions, temporarily imposed by the national and supranational regulatory authorities of the European Union, appear to exert a mitigating effect on herding. Finally, our results are robust to a range of model specifications.     

Pandemic-driven financial contagion and investor behavior: Evidence from the COVID-19

This paper studies the pandemic-driven financial contagion during the COVID-19 period and the impact of investor behavior on it by constructing three types of direct behavior measurements based on Google search volumes. More specifically, using a sample of 26 major stock markets around the world during the COVID-19 pandemic, we construct a non-linear financial contagion network via a dynamic mixture copula-EVT (extreme value theory) model to quantitatively detect and measure the complex nature of pandemic-driven financial contagion. Furthermore, through constructing direct investor behavior measurements including investor attention, sentiment, and fear, we find investor behavior plays an important role in explaining pandemic-driven financial contagion. We also find that the impacts of investor behavior on the pandemic-driven financial contagion are heterogeneous under several different settings, including market conditions, market development levels, regional subsets, and contagion directions.     

The role of economic structural factors in determining pandemic mortality rates: Evidence from the COVID-19 outbreak in France

Among the majority of research on individual factors leading to coronavirus mortality, age has been identified as a dominant factor. Health and other individual factors including gender, comorbidity, ethnicity and obesity have also been identified by other studies. In contrast, we examine the role of economic structural factors on COVID-19 mortality rates. Particularly, focusing on a densely populated region of France, we document evidence that higher economic “precariousness indicators” such as unemployment and poverty rates, lack of formal education and housing are important factors in determining COVID-19 mortality rates. Our study will help inform policy makers regarding the role of economic factors in managing pandemics.     

Forecasting for regulatory credit loss derived from the COVID-19 pandemic: A machine learning approach

The economic onslaught of the COVID-19 pandemic has compromised the risk management of financial institutions. The consequences related to such an unprecedented situation are difficult to foresee with certainty using traditional methods. The regulatory credit loss attached to defaulted mortgages, so-called expected loss best estimate (ELBE), is forecasted using a machine learning technique. The projection of two ELBEs for 2022 and their comparison are presented. One accounts for the outbreak's impact, and the other presumes the nonexistence of the pandemic. Then, it is concluded that the referred crisis surely adversely affects said high-risk portfolios. The proposed method has excellent performance and may serve to estimate future expected and unexpected losses amidst any event of extraordinary magnitude.     

Internal capital markets and employee wage: Evidence from China

The existing literature mainly focuses on the economic consequences of the internal capital market at firm level, while rarely literatures explore the effect on individual perspective. Based on manually collected data of the internal capital market from 2007 to 2018 in Chinese business groups, we examined whether and how internal capital market affects the employee wage. We find that internal capital market can add the employees wage. Further, the mechanism analysis shows that internal capital market can improve the employees wage by reducing operating risks, improving capital intensity and alleviating financing constraints. Heterogeneity analysis shows that this effect is more significant for private enterprises. This paper provides useful guideline for the improvement of employee's welfare and then benefit for enhance firm productivity.