Assistant Professor of Economics Andrew Greenland鈥檚 research looks at the U.S. equity market reactions to the COVID-19 pandemic in real time.
Research co-authored by Andrew Greenland, assistant professor of economics in the Martha and Spencer Love School of Business, provides a potential rationale for how investors are聽incorporating new information about COVID-19,聽in聽real time.
In 鈥,鈥 Greenland and co-authors Laura Alfaro, Harvard Business School, Anusha Chari, University of North Carolina at Chapel Hill, and Peter K. Schott, Yale School of Management, demonstrate daily aggregate and firm-level stock returns respond to聽unexpected changes in the trajectory of COVID-19 infections聽at a daily frequency.
鈥淭he decline in stock prices聽and volatility we saw through mid-March coincides with a lot of uncertainty about that trajectory,鈥 Greenland explains. 鈥淚n the early days of the outbreak, the estimated trajectory is very sensitive to daily reported infections. If daily聽case counts were higher than models had previously predicted,聽investors聽revised upwards their assessment of potential economic damage聽and markets opened down. Conversely, if cases grew by less than expected (even if cases grew by聽a lot),聽markets opened up.鈥
The co-authors created the following two GIFs to demonstrate how this played out in real time.
COVID-19 Cases vs US Stock Market Close
Here market聽returns seem to be detached from the total number of聽cases, but one can see that as the growth slows, the market’s recovery begins聽(easier to observe in log scale on the bottom panel).
COVID-19 Forecasts vs US Stock Market Close
This shows the change in forecasts聽(and confidence intervals)聽and their relationship to the market directly. The top panel shows聽forward looking case projections (in the pink cone)聽and the聽black dashed line聽indicates the change in those projections after the market closes each day. The bottom panel relates these changes in projections to the Wilshire 5000 index (an aggregate of all publicly traded stocks in the US). The large moves in the market (up or down) coincide with downward and upward revisions of case forecasts. After March 25, estimated case trajectory stabilizes and volatility starts to come down.
鈥淎ggregate and Firm-Level Stock Returns During Pandemics, in Real Time鈥 was released on the National Bureau of Economic Research鈥檚 website as a working paper and was published in Covid Economics, Vetted and Real-Time Papers, a new journal from the Centre for Economic Policy Research (CEPR) focused on disseminating emerging scholarly work on COVID-19 to improve the knowledge base for academics and policymakers.
The co-authors presented their work on May 5 in the inaugural online seminar of the Covid Economics series hosted by CEPR and the Graduate Institute, Geneva.