Hang in There: Stock Market Reactions to Withdrawals of COVID-19 Stimulus Measures
COVID Economics, December 2020, Issue 60, pp. 57-79.
22 Pages Posted: 30 Nov 2020 Last revised: 12 Jan 2021
Date Written: December 4, 2020
The COVID-19 pandemic prompted unprecedented economic stimulus worldwide. We empirically examine the impact of a withdrawal of fiscal stimulus policies on the stock markets. After constructing a database of withdrawal events, we use event study analysis and cross-country regressions to assess the difference between the pre- and post-event stock price returns. We find that markets react negatively to premature withdrawals—defined as withdrawals at a time when the daily COVID cases are high relative to their historical average—likely reflecting concerns about the withdrawal impact on the prospects for economic recovery. The design of a successful exit strategy from COVID-19 policy responses should account for these concerns.
Keywords: COVID-19, Stock price, Stimulus policy, Exit strategy, Event studies
JEL Classification: E52, G18, G38, R8
Suggested Citation: Suggested Citation