Did Financial Markets Overreact to COVID-19?

18 Pages Posted: 20 Sep 2020 Last revised: 17 Oct 2020

See all articles by Calvin W. H. Cheong

Calvin W. H. Cheong

Sunway University

Mohamed Ariff

Bond University; University Putra Malaysia

Niviethan Rao Subramaniam

Sunway University - Department of Economics and Finance

Date Written: September 14, 2020


Prior studies have shown that the COVID-19 pandemic has led to negative returns and increased volatilities in various financial markets. Not many however have sought to investigate why. With anecdotal evidence pointing to investors earning abnormal returns despite the pandemic, this paper sought to determine whether markets – for whatever reason – were overreacting to the pandemic. Using a sample of the largest 3,000 companies across 15 countries, we found evidence that markets were overreacting to various COVID-19 events. Specifically, we found that markets showed strong signs of reversal in response to negative events (e.g. lockdowns, confirmed cases, deaths). Positive events (e.g. vaccine development, recoveries) did not elicit a similar response. Our results suggest that the volatilities and negative returns during the sample period may be driven by non-COVID factors. This will have profound implications for future COVID-financial markets research and government policy as it redirects attention to individual countries rather than adopting a “global” approach to research or policy-setting.

Keywords: COVID-19, Market Overreaction, Market Sentiments, Event Study

JEL Classification: G15, G11

Suggested Citation

Cheong, Calvin W. H. and Ariff, Mohamed and Subramaniam, Niviethan Rao, Did Financial Markets Overreact to COVID-19? (September 14, 2020). Available at SSRN: https://ssrn.com/abstract=3694278 or http://dx.doi.org/10.2139/ssrn.3694278

Calvin W. H. Cheong (Contact Author)

Sunway University ( email )

Jalan Universiti
Bandar Sunway, 47500

Mohamed Ariff

Bond University ( email )

Gold Coast, QLD 4229

University Putra Malaysia ( email )

Selangor Darul Ehsan
Serdang, Selangor 43400

Niviethan Rao Subramaniam

Sunway University - Department of Economics and Finance ( email )


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