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

45 Pages Posted: 8 May 2020 Last revised: 26 May 2020

See all articles by Xiaolin Huo

Xiaolin Huo

Renmin University of China

Zhigang Qiu

School of Finance, Renmin University of China

Date Written: May 23, 2020

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

Suggested Citation

Huo, Xiaolin and Qiu, Zhigang, How does China’s Stock Market React to the Announcement of the COVID-19 Pandemic Lockdown? (May 23, 2020). Available at SSRN: https://ssrn.com/abstract=3594062 or http://dx.doi.org/10.2139/ssrn.3594062

Xiaolin Huo

Renmin University of China

59 Zhongguancun Street
Beijing, Beijing 100872
China

Zhigang Qiu (Contact Author)

School of Finance, Renmin University of China ( email )

Room 308
Mingde Main Building, Renmin University of China
Beijing, Beijing 100872
China

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