Learning about unprecedented events: Agent-based modelling and the stock market impact of COVID-19.

We model the learning process of market traders during the unprecedented COVID-19 event. We introduce a behavioural heterogeneous agents' model with bounded rationality by including a correction mechanism through representativeness (Gennaioli et al., 2015). To inspect the market crash induced by the pandemic, we calibrate the STOXX Europe 600 Index, when stock markets suffered from the greatest single-day percentage drop ever. Once the extreme event materializes, agents tend to be more sensitive to all positive and negative news, subsequently moving on to close-to-rational. We find that the deflation mechanism of less representative news seems to disappear after the extreme event.

Comparison of the Performances for CAPM and Fama-French models During COVID-19

Since the outbreak of COVID-19, it has caused a startling stun to both society and economy in numerous nations, where different industries suffered unequally. This paper reviews the various performance of the Capital Asset Pricing Model (CAPM), and the Fama-French three-factor model and the five-factor model in different regions and industries. To metric the performance, various statistics models and scaling are applied including Pearson correlation, linear regression, R2 scores, t-test, etc. Specifically, this paper demonstrates the different performances of the CAPM model on the US and Egyptian stock markets, whereas using generalized method of moments in a panel data analysis to evaluate the performance in the U.S. market and the paired sample t-test and Wilcoxon signed-rank to evaluate the performance in the Egyptian market. The Fama-French three-factor model and five-factor model are both based on the U.S. market and analyze the model's performance (measured by significant level) in the U.S. market in general and in individual sectors, respectively. Whereas, in terms of three-factors model, the OLS estimation and relapse expected excess return are used onto the variables and multiple linear regression method was used to study the significance of factors in three sub-industries. Regarding to five-factors model, a multivariate regression with covariates and OLS estimation are the method for evaluation. These results shed light for deeply understanding the model and recognizing the impact on the security market of the COVID-19. © 2023 SPIE.

Does US Infectious Disease Equity Market Volatility Index Predict G7 Stock Returns? Evidence Beyond Symmetry

During the COVID-19 pandemic, Baker et al. (2020) [The unprecedented stock market reaction to COVID-19. The Review of Asset Pricing Studies, 10, 742–758.] proposed the infectious disease equity market volatility (ID-EMV) index, which tracks US equity market volatility caused by infectious diseases. We extended the literature by using this newly developed ID-EMV index to examine its asymmetric effect on the share market returns of the G7 countries, which include the United Kingdom, Italy, Japan, Germany, France, Canada, and the United States of America. Moreover, we used novel techniques like the quantile-on-quantile regression test, quantile cointegration test, and quantile unit root test. The quantile cointegration test indicates that the infectious disease EMV index is cointegrated with G7 stock returns. Moreover, the quantile-on-quantile regression technique reveals that the infectious disease index positively affects stock returns during bullish states of the stock markets. In contrast, it negatively affects stock returns during bearish states of the stock market returns. The negative effect of the bearish states implies that investors may discourage investments during the downturns of the economy, whereas they need to boost their investments during economic booms.

BETA INVERSION EFFECT OF COVID-19 PANDEMIC USING CAPITAL ASSET PRICING MODEL

This paper aims to analyze the effect of the beta inversion on COVID-19 by applying the capital asset pricing model and difference-in-differences (DiD) model in the US covering the five-year period from April 26, 2017, to April 22, 2022. Coronavirus induced pandemic has altered the fundamentals of the market (Baker, Bloom, Davis, Kost, et al., 2020;Mazur et al., 2021). The higher the value beta, the greater the potential for better long-term returns, according to the capital asset pricing model (CAPM). This study showed that companies that appeared to be safe to invest in are suddenly more dangerous, and the opposite is also true. Such as industries that previously shown a contractionary effect — aviation and retail, during COVID-19 have shown more benign effects on the market. The DiD model also reveals the same. The World Health Organization (WHO) intervention had a negligible effect on the treatment group, according to the model. It is obvious that beta has been inverted before investing in these sectors. The companies that are expected to perform better like pharma and biotech, have underperformed. This study deploys the understanding of the capital asset pricing model to see how different markets performed during and before the pandemic. © 2023 The Authors.

Effects of market liquidity on price dynamics in a heterogeneous belief model

To understand the effect of liquidity on asset pricing, this study constructs a boundedly rational asset pricing model, introducing market liquidity and heterogeneous beliefs. Based on our model, we conduct empirical tests using the S&P 500 index from 1991 to 2021 and the CSI 500 index from 2007 to 2021. We find that market liquidity significantly influences investors' expectations and belief switching. When market liquidity is scarce, fundamentalists in both markets expect the price to converge more quickly to its fundamental value, whereas chartists perceive that the price deviates from its fundamental value less rapidly. Lack of liquidity mitigates the investors' original switching strategy, resulting in positive feedback as a net effect. Moreover, the S&P 500 index is efficient, whereas the CSI 500 index is slightly undervalued in the long run. Both markets exhibit large fluctuations and inefficiency during short periods such as the 2008 financial crisis and COVID-19 pandemic. As such, safeguards should be implemented against sudden shocks and the resulting price deviation and market inefficiency.

A threshold effect of COVID-19 risk on oil price returns.

Using U.S. data, we investigate how the COVID-19 pandemic influences oil price returns in an asset pricing framework. Unlike earlier studies, we consider a threshold model to allow for the possibility that COVID-19 risk may not play a role until it reaches a certain level. Based on WTI crude oil spot price data from January 2020 to December 2021, our findings show that oil returns significantly decline with the daily number of COVID-19 deaths but only if the daily death toll exceeds approximately 2100. In addition, a more severe COVID-19 pandemic can substantially increase the exposure of oil returns to various systematic risk factors, which has not been documented in previous literature.

Attention to Authority: The behavioural finance of Covid-19.

In this paper we investigate the predictability of cryptocurrency returns following increases in Covid-19 cases/deaths. We find that the rate of government intervention moderates the impact that Covid-19 cases/deaths have on cryptocurrency returns. We show that in periods of tightening government intervention, increases in Covid-19 cases positively predict cryptocurrency returns. We argue that this is due to investors imputing their expectations of the pandemic through a 'combined' signal.

The impact of COVID-19 on the banking sector. Are we heading for the next banking crisis?

Purpose: This study aims to examine the effect of the COVID-19 pandemic on the banking sector and to assess if COVID-19 was a trigger for the banking crisis. Design/methodology/approach: To achieve the main objective, the beta of the banking sector was calculated and analysed. In addition, a fixed panel regression model was applied over the period from the 30th of December 2019 until the 24th of September 2021. Findings: The results suggest that the pandemic contributed to higher volatility and risk in banking sector but did not confirm a systematic banking crisis. Originality/value: This paper contributes to the literature by analysing the COVID-19 pandemic as a potential trigger for a banking crisis. This paper also contributed by studying the effects of COVID-19 on the banking sector, especially the risk in the banking sector. © 2023, Emerald Publishing Limited.

Stock valuation during the COVID-19 pandemic: An explanation using option-based discount rates.

Changes in short-term expected market returns (discount rates) were a significant driver behind the unprecedented fluctuations in equity markets during the first 4 months of the COVID-19 pandemic. Using option-based estimates of the expected market risk premium for 13 international markets, we find that approximately 40% of the change in market values during the COVID-19 pandemic can be attributed to changes in short-term discount rates. We also document sharply downward sloping term structures of equity risk premia at the start of the pandemic, consistent with Hasler and Marfè (2016). Finally, we document a significant increase in the correlation between index returns and changes in the short-term discount rate during the pandemic compared to the period before the pandemic.

The Effect of Covid-19 on the Stock Market of the Travel And Leisure Industry: Evidence from the United States

This study explores the impact of the COVID-19 pandemic on the performance of the US travel and leisure stock, using daily data sets from December 31, 2019 to December 2, 2020. Applying the multifactor model, which is an extension of the capital asset pricing model, the study examines how governmental announcements and policy measures to contain the pandemic situation impact the stock prices, controlling for confirmed cases, growth rates, and death rates owing to the pandemic. Further, to reduce the potential bias in heterogeneity, crucial macroeconomic regressors such as oil prices, exchange rates, and a volatility index are included. The study obtains a heterogeneous impact across quantiles. Government stringency measures negatively impact the travel and leisure stock prices, while the announcement of economic support programs positively impacts the stocks, particularly at the high-end quantiles. We advocate that the introduction of asset-light and fee-based strategies will enable the firms to overcome the adverse implications of the pandemic in the long run. This study offers major insights for protecting and developing the recovery of the travel and leisure stock market by considering the importance of government interventions and their effective implementation.

Shock transmissions and business linkages among US sectors.

This paper examines the shock spillovers between US sectors and their dependence on the intersectoral business linkages. Our forecast error variance decompositions reveal significant shock transmissions among trading sectors, especially in turbulent periods such as the financial crisis and the COVID-19 pandemic. The dymamics of shock spillovers reflect the impacts of the pandemic on economic sectors. Shock spillovers are shown to be influenced by the strength of the intersectoral trading relationships. Shocks to a sector's important supplier have a strong impact on the forecast error variance of the sector's stock return. The total directional spillovers from/ to a sector are linked with the number of close commercial linkages between that sector and other sectors. Supplementary Information: The online version contains supplementary material available at 10.1007/s10479-022-04979-8.

CRYPTOCURRENCY RETURNS DURING COVID: Implications for Its Status as a Currency

To the extent that currency is a store of value, during times of uncertainty, its value could potentially be higher, providing holders a strategy to avoid capital losses on assets such as equities or bonds and to secure capital gains. The recent and ongoing COVID pandemic provides an opportunity to assess how crtypocurrency fares as a store of value, as the pandemic has disrupted economies, possibly inducing speculative motives for holding cryptocurrency. This paper sought to establish if Bitcoin and Ethereum generated any excess returns over the recent time period covering the pandemic. Parameter estimates from a Capital Asset Pricing Model revealed that neither Bitcoin nor Ethereum realized excess returns during the COVID pandemic. This suggests that to the extent that a standard and generally acceptable medium of exchange has a speculative component to its demand, crytopcurency such as Bitcoin and Ethereum may not be good candidates as a medium of exhhange. © 2022, Nigerian Economic Society. All rights reserved.

Effects of market liquidity on price dynamics in a heterogeneous belief model

To understand the effect of liquidity on asset pricing, this study constructs a boundedly rational asset pricing model, introducing market liquidity and heterogeneous beliefs. Based on our model, we conduct empirical tests using the S&P 500 index from 1991 to 2021 and the CSI 500 index from 2007 to 2021. We find that market liquidity significantly influences investors’ expectations and belief switching. When market liquidity is scarce, fundamentalists in both markets expect the price to converge more quickly to its fundamental value, whereas chartists perceive that the price deviates from its fundamental value less rapidly. Lack of liquidity mitigates the investors’ original switching strategy, resulting in positive feedback as a net effect. Moreover, the S&P 500 index is efficient, whereas the CSI 500 index is slightly undervalued in the long run. Both markets exhibit large fluctuations and inefficiency during short periods such as the 2008 financial crisis and COVID-19 pandemic. As such, safeguards should be implemented against sudden shocks and the resulting price deviation and market inefficiency. © 2022 Informa UK Limited, trading as Taylor & Francis Group.

Factor Models of Cryptocurrency Returns: Financial Theory Approach

The purpose of the article is to identify the determinants of cryptocurrency returns. To achieve this goal, the article presents an attempt to create factors that reflect the characteristics of the cryptocurrency market, and uses Fama–French type multifactor models for analyzing the returns of cryptocurrencies. Standard factors based on capitalization indicators, cryptocurrency trading volumes and the third momentum were built. The paper also presents an estimation of the impact of these factors on various groups, or portfolios, of cryptocurrencies in certain periods of time (the period of market formation and the period of high price volatility of the market, including its division into two sub-periods: before the coronavirus pandemic and during the pandemic), which allows us to consider the heterogeneity of data both in time and for certain indicators. As a result of estimating regressions on daily data, empirical evidence in favor of a positive relationship between the excess return of cryptocurrency groups with the constructed factors was obtained. In addition, the paper checks the relationship between the cryptocurrency market and the stock market. Prior to the beginning of high volatility period, cryptocurrencies could be considered as an asset for the diversification of market risk, but later there could be found co-movement of the cryptocurrency market and the stock market, seen from the appearance of the statistical significance of the coefficient before a variable reflecting the market risk premium. In addition, it was shown that the frequency of data can affect the estimates of the coefficients but does not affect the fundamental conclusions of the analysis. The findings indicate the need for further analysis of the cryptocurrency return factors on more homogeneous samples © 2022, Ekonomicheskaya Politika.All Rights Reserved.

THE RELATIONSHIP BETWEEN COVID-19 AND THE FINANCIAL MARKET

This chapter discusses methodological challenges that may be faced by researchers interested in financial markets in relation to the COVID-19 pandemic. In particular, we focus on the behaviour of investors and consider three aspects that affect their investment decision process, namely comovement, cross-sectional asset pricing, and out-of-sample forecasting. We argue that, in relation to the pandemic, relevant financial time series such as asset returns exhibit nonlinear dynamics, which should be suitably incorporated within appropriate methodological tools. We discuss possible existing approaches that ensure that those nonlinearities are properly accounted for. Finally, possible areas of future research are touched upon. © 2022 by Emerald Publishing Limited.

Investing style and sensitivity analysis in U.S. stock market during Covid-19 based on multi-factor model

According to the unimaginable influence of Covid-19 and the essential of capital asset pricing in the market, this article analyzes the TV industry of the US stock market before and during the epidemic based on the Fama-French five-factor model. Fama-French five-factor model comprehensively considers the impact of market risk premium (Mkt-RF), market value scale factor, (SMB), book-to-market value ratio factor (HML), profit factor (RMW) and investment factor (CMA) on this industry. Meanwhile, it can conduct a comprehensive evaluation of the impact of Covid-19 on the TV industry. The data in this article was selected from Kenneth R. French's databases and used multiple linear regression to obtain the results. The performance of factors is different due to the outbreak of Covid-19. By analyzing the result, it found that Mkt-RF, SMB are not significant in the model, but HML, RMW, CMA have changed from insignificant to significant. It indicates that during the Covid-19, investors are recommended to pay more attention to the firms with high book-to-market ratios, stable profitability, and aggressive investment style in the USA TV industry. Therefore, research on the stock market of the TV industry plays an important role in the steady development of the economy, the creation of social wealth, and the improvement of people's living standards. © 2021 IEEE.

Research on the Impact of COVID-19 on Book Industry based on Fama-French Five Factor Model

Asset pricing has been regarded as a popular subject in modern financial research. Covid-19 has imposed a remarkably severe impact on the global economy. Taking the book industry of 49 industries in the French database for analysis, the paper classifies the daily data into pre-epidemic (June 2019-February 2020) and post-epidemic (March 2020-November 2020), and calculates multiple factor coefficients via multiple linear regression. According to the research findings, the book market became sensitive to the impact of the epidemic, while value stocks and firms with stable revenues are favored. There has been no impact caused by the epidemic on the small-scale effect of the industry, with the investment profile factor consistently failing. It is suggested that investors can consider the companies with small market capitalization, high book-to-market ratios, and stable earnings during the outbreak of epidemic. © 2021 IEEE.

Analysis of the effect on US manufacture industry during Covid-19 based on Fama-French five-factor model

It is crucial to find the fair value of financial assets for asset pricing model in relevant research and practice. With continuous improvement of the model, researchers are expected to improve the applicability and interpretation ability. Covid-19 is a rare global epidemic disease in human history, causing large-scale negative impact on the financial market. Therefore, it is necessary to study the practicability of asset pricing model, facing major and unpredictable factors. Based on the Fama French five-factor model, this paper compares the model factors of American manufacturing stocks from July 2019 to February 2020, and March 2020 to October 2020. The data mentioned in this paper are all selected from the database of Kenneth R. French's web. French, using the relevant information of American stock market to get various data. Multiple linear regression method and t-test are applied to analyze. The results showed that intercept investment. The asset pricing model changed from non-significant before the epidemic to significant;SMB coefficient is significant both before and after the epidemic, while coefficient increases after the epidemic;RMW is significant before the epidemic and is non-significant after the epidemic;MKT coefficient is significant both before and after the epidemic;CMA is non-significant both before and after the epidemic. Investors are advised to focus more on the explanatory power of MKT, SMB and HML factors on asset pricing when investing on US manufacturing stocks during the epidemic. © 2021 IEEE.

COVID-19 and the Economy: Summary of research and future directions.

This article presents a literature review of the 81 articles accepted in the Finance Research Letters Special Issue titled "COVID-19 and the Economy". The articles are classified into five broad areas (investments and asset pricing, the macroeconomy and banking, commodities, corporate finance, and other topics). We summarize the key findings of the articles by area and highlight the influence of the articles as measured by Google Scholar citations. We conclude by presenting directions for future research.

Investment strategies in pandemic situations: an analysis and comparison of prospective returns between developed and emerging markets

This study empirically analyzes return data from developed and emerging markets to assess whether emerging markets show superior performance during the COVID-19 pandemic in terms of cost of equity. It analyses panel data from eight country indices of developed and emerging countries as well as eight exemplary companies from developed and emerging countries, covering the period from 2000 to 2020. The results provide evidence that emerging markets do not perform in a better way than developed markets. The findings highlight the need for a reassessment of the generalized notion that emerging markets are more profitable than developed markets in such crises which affect the core of their economic structure. It provides investors with meaningful advice on the creation of an investment strategy if they wish to perform equity investments in similar periods like the COVID-19 pandemic. The study contributes to the literature by advancing this research area and is the first study which analyzes and compares the cost of equity of developed and emerging markets during the COVID-19 pandemic.