How does China’s Stock Market React to the Announcement of the COVID-19 Pandemic Lockdown?

Abstract

In this paper, we study how China’s stock market reacts to the sudden outbreak of COVID-19 in 2020, particularly to the announcement of the pandemic lockdown. In general, we observe reversals both at the industry level and at the firm level due to investors’ overreactions to the pandemic lockdown. For industry- and firm-level stocks with positive cumulative abnormal returns in the event window when Wuhan was locked down, the reversals are stronger. Thus, the reversals effects are mostly driven by industries and stocks that positively overreact to COVID-19 than do other types of investors. Further investigation shows that overreactions are stronger for stocks with lower institutional ownership, which means that retail investors react more strongly to COVID-19. Among stocks with positive cumulative abnormal returns in the event window, those with higher idiosyncratic volatilities and lower book-to-market ratios tend to have worse performance after one month.

Keywords: COVID-19, Pandemic Lockdown, China’s Stock Market, Overreaction

JEL Classification: G10, G14, D83