Structural Breaks in Interactive Effects Panels and the Stock Market Reaction to COVID-19

Figures & data

Table 1 Descriptive statistics.

Variable	Mean	SD	Min	Max	UR	CD	corr
RET	−0.392	4.440	−26.795	17.656	−5.769***	161.010***	−0.007
CASE	99.125	1314.487	−20289	28789	−4.137***	13.631***	0.020
DEATH	275.842	985.860	−1507	8101	−2.098*	63.246***	0.023
STR	1.348	9.163	−47.2	88.9	−5.768***	114.333***	−0.007
RESP	1.543	6.732	−30.3	64.3	−5.633***	117.615***	−0.007
CONT	1.501	7.207	−35.4	70.8	−5.651***	108.350***	−0.007
ECON	1.796	10.293	−50	100	−5.263***	55.289***	−0.005
ER	0.460	41.260	−740	1155	−5.930***	4.418***	0.003
VOL	1.663	20.841	−33.678	85.372	−4.160***	–	–
TBILL	0.399	0.535	0.100	1.520	−3.405**	–	–
MRET	−0.392	3.515	−14.864	5.479	−4.312***	–	–

NOTE: “Mean,” “SD,” “Min,” and “Max” refer to the sample average, the standard deviation, the minimum value and the maximum value of each variable. The column labeled “UR” reports some unit root test results. If the variable exhibits cross-sectional variation we employ the CIPS test of Pesaran (2007), which allows cross-sectional dependence in the form of a common factor. If the variable only varies over time, we employ unit root test of Elliott, Rothenberg, and Stock (1996). Both tests are augmented with four lags to capture any serial correlation in the regression errors. “CD” and “corr” refer to Pesaran’s (2021) test for cross-sectional correlation and the average pair-wise cross-correlation coefficient after defactoring. The CD and corr results for VOL, TBILL and MRET are not reported as these variables do not vary by country. The column The variables are stock returns (RET), cases (CASE), deaths (DEATH), government stringency (STR), overall government response (RESP), government containment and health (CONT), government economic support (ECON), the U.S. dollar exchange rate (ER), stock market volatility (VOL), the three-month U.S. treasury bill rate (TBILL) and average stock returns (MRET).

Table 2 Main results.

Regressor	Coeff	Spec 1	Spec 2	Spec 3
CASE	β	−0.001**	−0.002***	−0.002***
		(0.000)	(0.001)	(0.001)
	δ	0.001***	0.002***	0.002***
		(0.000)	(0.001)	(0.001)
DEATH	β	−0.002*	−0.002**	−0.002**
		(0.001)	(0.001)	(0.001)
	δ	0.002*	0.002**	0.002**
		(0.001)	(0.001)	(0.001)
ECON	β	0.056**	0.070***	0.060**
		(0.028)	(0.027)	(0.026)
	δ	−0.068**	−0.082***	−0.073***
		(0.029)	(0.027)	(0.027)
STR	β	−0.077***
		(0.020)
	δ	0.075***
		(0.022)
RESP	β		−0.075***
			(0.028)
	δ		0.066**
			(0.031)
CONT	β			−0.065***
				(0.023)
	δ			0.056**
				(0.024)
r		4	4	4
n		4	4	4
SW		31.182***	24.108***	24.096***
$\widehat{b}$		April 5	April 5	April 5
95% CI		[March 29,	[March 29,	[March 29,
		April 12]	April 12]	April 12]

Unreported controls: Country fixed effects, VOL, TBILL, MRET and ER

NOTE: The dependent variable is stock returns (RET). The main regressors are cases (CASE), deaths (DEATH), government stringency (STR), overall government response (RESP), government containment and health (CONT) and government economic support (ECON). All specifications include country fixed effects, the U.S. dollar exchange rate (ER), stock market volatility (VOL), the three-month U.S. treasury bill rate (TBILL) and average stock returns (MRET) as controls. As estimates of the unobserved factors we use the main regressors of each specification and ER. All specifications also include country fixed effects, VOL, TBILL and MRET as observed common factors. β and δ refer to the pre-break slope and the size of the break, respectively. r and n refer to the number of panel data regressors and observed common factors, respectively. SW refers to the sup-Wald test for the existence of a structural break, $\widehat{b}$ refers to the estimated breakpoint and “95% CI” refers to the associated 95% confidence interval. The reported dates refer to the last day of the relevant week. The numbers within parentheses are the standard errors. Finally, ${}^{*},{}^{**}$ and ${}^{***}$ denote statistical significance at the 10%, 5%, and 1% levels, respectively.

Fig. 1 Plotting the cross-sectional averages of RET, STR, CONT and RESP.

NOTE: The figure plots the weekly cross-sectional averages of stock returns (RET), government stringency (STR), government containment and health (CONT) and overall government response (RESP). The break date estimate and the associated 95% confidence interval are taken from Table 2. The reported dates refer to the last day of the relevant week.

Pesaran, M. H. (2007), “A Simple Panel Unit Root Test in the Presence of Cross-Section Dependence,” Journal of Applied Econometrics, 22, 265–312.

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Elliott, G., Rothenberg, T. J., and Stock, J. H. (1996), “Efficient Tests for an Autoregressive Unit Root,” Econometrica, 64, 813–836. DOI: 10.2307/2171846.

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