The role of Covid-19 for Chinese stock returns: evidence from a GARCHX model

ABSTRACT

This paper examines the effect of Covid-19 pandemic on the Chinese stock market returns and their volatility using the generalized autoregressive conditionally heteroskedastic GARCHX model. The GARCHX model allows us to include Covid-19 information within the GARCH framework. The findings document that daily increases in total confirmed Covid-19 cases in China, measured as total daily deaths and cases, have a significant negative impact on stock returns, with the negative impact of the Covid-19 on stock returns being more pronounced when total deaths proxy the effect of this infectious disease. The results also document that Covid-19 has a positive and statistically significant effect on the volatility of these market returns. Overall, new evidence is offered that infectious diseases, such as Covid-19, can seriously impact market returns, as well as their volatility. The findings could be essential in understanding the implications of Covid-19 for the stock market in China.

KEYWORDS:

• Stock market returns
• Covid-19
• China
• GARCHX model

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/

2. In a recent survey, Goodell (2020) finds that the research on the effects of pandemics is seriously limited.

Additional information

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.