Evolution of COVID-19 Impact on Russian Stock Market: Panic Effect

Over the past few years, many research papers have referred to stock market volatility in relation to investor attention and sentiment and our article adds to the current literature on financial market reactions to the economic consequences of COVID-19. An event such as an outbreak of an infectious disease causes a negative change in investor sentiment, which strongly influences their investment decisions and, consequently, stock market prices. The subject of the study is the mutual influence of stock market characteristics and market sentiment, during a COVID-19 pandemic crisis. The purpose of the study is to provide empirical support for the hypothesis of indirect impact of uncertainty and panic under the COVID-19 pandemic on the dynamics of the stock market in Russia. The World Health Organization and experts forecast that the world will face more than one crisis related to the spread of infectious diseases in the future, so understanding the mechanisms of mutual influence of sentiment and financial markets remains relevant. In this study, we take a novel approach to deriving an indicator for panic that has not been used before. We perform econometric modeling using a Vector Autoregressive Model (VAR) and a Vector Error Correction Model (VECM), which allows us to describe in the model not only the long-term equilibrium but also the dynamics towards it. As a result, we got consistent and efficient estimates of the long-term and short-term effects of panic and mortality rates on the volatility of the RTS stock index and found that the market reaction to COVID-19 changed as the pandemic spread: the effects of uncertainty and panic, while having a significant impact at the beginning of the crisis, faded away. The conclusions obtained in the analysis of the Russian stock market dynamics coincide with those obtained by other authors in their analysis of markets in other countries over a similar period.

1. Jin L., Zheng B., Ma J., et al. Empirical study and model simulation of global stock market dynamics during COVID-19. Chaos, Solitons & Fractals. 2022;159:112138. DOI: 10.1016/j.chaos.2022.112138

2. Szczygielski J. J., Charteris A., Bwanya P. R., Brzeszczyński J. Which COVID-19 information really impacts stock markets? Journal of International Financial Markets, Institutions and Money. 2023;84:101592. DOI: 10.1016/j.intfin.2022.101592

3. Mazur M., Dang M., Vega M. COVID-19 and the March 2020 stock market crash. Evidence from S&P1500. Finance Research Letters. 2021;38:101690. DOI: 10.1016/j.frl.2020.101690

4. Egorova Yu.V., Nepp A. N. The impact of epidemics on economic development and financial markets: A structured overview. Vestnik Moskovskogo universiteta. Seriya 6: Ekonomika = Moscow University Economics Bulletin. 2021;(6):28–53. URL: https://www.elibrary.ru/item.asp?id=47576052 (In Russ.).

5. Al-Awadhi A.M., Alsaifi K., Al-Awadhi A., Alhammadi S. Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance. 2020;27:100326. DOI: 10.1016/j.jbef.2020.100326

6. Ali M., Alam N., Rizvi S. A.R. Coronavirus (COVID-19) — an epidemic or pandemic for financial markets. Journal of Behavioral and Experimental Finance. 2020;27:100341. DOI: 10.1016/j.jbef.2020.100341

7. Capelle-Blancard G., Desroziers A. The stock market is not the economy? Insights from the COVID-19 crisis. SSRN Electronic Journal. 2020. DOI: 10.2139/ssrn.3638208

8. Ashraf B. N. Economic impact of government interventions during the COVID-19 pandemic: International evidence from financial markets. Journal of Behavioral and Experimental Finance. 2020;27:100371. DOI: 10.1016/j.jbef.2020.100371

9. Adekoya A. F., Kofi Nti I. The COVID-19 outbreak and effects on major stock market indices across the globe: A machine learning approach. Indian Journal of Science and Technology. 2020;13(35):3695–3706. DOI: 10.17485/IJST/v13i35.1180

10. Da Z., Engelberg J., Gao P. In search of attention. The Journal of Finance. 2011;66(5):1461–1499. DOI: 10.1111/j.1540–6261.2011.01679.x

11. Smales L.A. Investor attention and global market returns during the COVID-19 crisis. International Review of Financial Analysis. 2021;73:101616. DOI: 10.1016/j.irfa.2020.101616

12. Dzielinski M. Measuring economic uncertainty and its impact on the stock market. Finance Research Letters. 2012;9(3):167–175. DOI: 10.1016/j.frl.2011.10.003

13. Da Z., Engelberg J., Gao P. The sum of all FEARS investor sentiment and asset prices. The Review of Financial Studies. 2015;28(1):1–32. DOI: 10.1093/rfs/hhu072

14. Castelnuovo E., Tran T.D. Google it up! A Google trends-based uncertainty index for the United States and Australia. Economics Letters. 2017;161:149–153. DOI: 10.1016/j.econlet.2017.09.032

15. Lyócsa Š., Baumöhl E., Výrost T., Molnár P. Fear of the coronavirus and the stock markets. Finance Research Letters. 2020;36:101735. DOI: 10.1016/j.frl.2020.101735

16. Erdem O. Freedom and stock market performance during COVID-19 outbreak. Finance Research Letters. 2020;36:101671. DOI: 10.1016/j.frl.2020.101671

17. Szczygielski J. J., Bwanya P. R., Charteris A., Brzeszczyński J. The only certainty is uncertainty: An analysis of the impact of COVID-19 uncertainty on regional stock markets. Finance Research Letters. 2021;43:101945. DOI: 10.1016/j.frl.2021.101945

18. Costola M., Iacopini M., Santagiustina C. R.M.A. Public concern and the financial markets during the COVID-19 outbreak. arXiv:2005.06796. 2020. URL: https://arxiv.org/pdf/2005.06796.pdf

19. Lu N., Cheng K.-W., Qamar N., et al. Weathering COVID-19 storm: Successful control measures of five Asian countries. American Journal of Infection Control. 2020;48(7):851–852. DOI: 10.1016/j.ajic.2020.04.021

20. Papadamou S., Fassas A., Kenourgios D., Dimitriou D. Direct and indirect effects of COVID-19 pandemic on implied stock market volatility: Evidence from panel data analysis. Munich Personal RePEc Archive. MPRA Paper. 2020;(100020). URL: https://mpra.ub.uni-muenchen.de/100020/1/MPRA_paper_100020.pdf

21. Ramelli S., Wagner A. F. Feverish stock price reactions to COVID-19. The Review of Corporate Finance Studies. 2020;9(3):622–655. DOI: 10.1093/rcfs/cfaa012

22. Cepoi C.-O. Asymmetric dependence between stock market returns and news during COVID-19 financial turmoil. Finance Research Letters. 2020;36:101658. DOI: 10.1016/j.frl.2020.101658

23. Ashraf B. N. Stock markets’ reaction to COVID-19: Cases or fatalities? Research in International Business and Finance. 2020;54:101249. DOI: 10.1016/j.ribaf.2020.101249

24. Narayan P. K., Phan D. H.B., Liu G. COVID-19 lockdowns, stimulus packages, travel bans, and stock returns. Finance Research Letters. 2021;38:101732. DOI: 10.1016/j.frl.2020.101732

25. Aggarwal S., Nawn S., Dugar A. What caused global stock market meltdown during the COVID pandemic — lockdown stringency or investor panic? Finance Research Letters. 2021;38:101827. DOI: 10.1016/j.frl.2020.101827

26. Oyelami L. O., Ogbuagu M. I., Saibu O. M. Dynamic interaction of COVID-19 incidence and stock market performance: Evidence from Nigeria. Annals of Data Science. 2022;9(5):1009–1023. DOI: 10.1007/s40745–022–00407–7

27. Alzyadat J. A., Asfoura E. The effect of COVID-19 pandemic on stock market: An empirical study in Saudi Arabia. The Journal of Asian Finance, Economics and Business. 2021;8(5):913–921.