Hang in There: Stock Market Reactions to Withdrawals of COVID-19 Stimulus Measures

23 Pages Posted: 26 Jan 2021

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department

Yunhui Zhao

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2020

Abstract

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.

JEL Classification: E52, G18, G38, E62, E31, I12, G10

Suggested Citation

Chan-Lau, Jorge Antonio and Zhao, Yunhui, Hang in There: Stock Market Reactions to Withdrawals of COVID-19 Stimulus Measures (December 1, 2020). IMF Working Paper No. 2020/285, Available at SSRN: https://ssrn.com/abstract=3772490

Jorge Antonio Chan-Lau (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Yunhui Zhao

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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