The numbers of COVID-19 increase daily, both confirmed cases and deaths. All over the world, shock waves are felt with impacts on economies in general and the financial sector in particular. Aiming to assess the relationship between confirmed cases and deaths and the behaviour of stock markets, the authors perform a dynamic analysis, based on the Pearson correlation coefficient, for 10 of the most affected countries in the world. As expected, they find evidence that the number of COVID-19 cases had a negative effect on stock markets, and that the current second wave is penalizing them. They also find that deaths have a more relevant impact than the number of confirmed cases.
TopIntroduction
As at 18th November 2020, COVID-19 has almost reached a total of 56 million confirmed cases all over the world, and already caused more than 1.3 million deaths, in more than 200 countries. The evolution of the pandemic has led to national and supranational authorities issuing recommendations and taking measures to contain the spread of the disease.
The occurrence of epidemics and pandemics is not new in the world, with major examples being the Black Death, Bleeding Fever, Cholera, Spanish Flu, Swine Flu, Ebola or Dengue. COVID-19 is a severe acute respiratory syndrome (SARS), with a zoonotic origin. The occurrence of SARS is not new, going back at least to 2003, although at that time it had very reduced effects compared with the present situation. For example, Lee (2003), Nippani and Washer (2004) or Chen, Jang and Kim (2007) reported some effects on business and education activities, while Del Giudice and Paltrinieri (2017) or Ichev and Marinč (2018) show evidence of the impacts on different stock markets, in this case caused by the Ebola outbreak. Jwo, Chen and Yeh (2006), regarding the SARS episode of 2003, conclude that stock market movements in the infected areas were similar to the paths of the transmission of the disease.
COVID-19 has a major impact on many aspects of life, not only health (physical and psychological) but also economic activities, with decisions on confinements and lockdowns creating great uncertainty (Baker, Farrokhnia, Meyer, Pagel & Yannelis, 2020). For example, Aslam, Awan, Syed, Kashif and Parveen (2020) report the effect of COVID-19 on sentiments like fear and uncertainty, which are also spreading all over the world. Economically speaking, each month of the pandemic could have an impact of between 2.5% and 3% on GPD, according to Fernandes (2020), with a direct effect on several areas of the economy, with the respective impact on unemployment. There is concern about increased poverty levels (Lucas, 2020; Sumner, Hoy & Ortiz-Juarez, 2020) and for these reasons, it is crucial to make some policy reforms to help countries recover their economies as a whole (Aslam, Memon & Mughal, 2020; Zhang, Hu & Ji, 2020).
Financial markets have also suffered greatly, as reported in many studies which will be referred to in the following section. Those studies analyze different kinds of markets and assets (stock indices, sectoral shares, commodities or cryptocurrencies, among others). Issues like the contagion effect and the way information is transferred between markets during crisis moments are not new and have already drawn the attention of several authors (see, for example, Lin, Engle & Ito, 1994) as well as the importance of contagion in defining portfolios (Jiang, Fu & Ruan, 2019; Mensi, Hammoudeh & Kang, 2017; Mensi, Boubaker, Al-Yahyaee & Kang, 2018).
Another important issue to be analysed is the possibility of different effects in the first wave of the disease and the second wave, which is currently affecting many countries. This is very important information for decision-makers, who must take measures to lower the infection rate and at the same time mitigate economic and financial losses.
In this chapter we propose to analyse how confirmed cases and deaths had an effect on the stock market returns of 10 countries among the most affected by the disease: Belgium, Brazil, France, Germany, India, Italy, Portugal, Spain, UK and USA. With a sample of data starting at the beginning of March 2020 (when the first cases appeared in those countries) and ending in October 2020 (when data was retrieved), we analyse the evolution of new confirmed cases/deaths and the performance of stock market indices in those countries. We used a correlation coefficient with a sliding windows approach, which allowed us to analyse the evolution of those correlations over time. This approach is innovative once it deals with two different waves of the disease, identifying possible different patterns in both waves.