COVID-19 Pandemic: Stock Markets Reaction to the Mortality Rates and Lockdown Policies

Abstract

The coronavirus (COVID-19) pandemic is disrupting the world as we knew it, with a heavy toll on economic activities and the structure of politics. Governments, media websites, and research institutions update information about the changes in the COVID-19 epidemic every day. The most intuitive information may be the changes in the number of confirmed cases and deaths, which shape investors’ sentiments and confidence in the financial markets. The goal of this study is to investigate the impact of new mortality rates of COVID-19 on the UK and US stock markets over the period January 1 – September 30, 2020. We employed a simple regression model to examine whether new mortality rates contain information beyond the lagged market volatility. By constructing a lockdown dummy variable, we further control for the impact of government lockdown policies on market volatility in our model. Our findings show that new mortality rates caused by COVID-19 pandemic have significant positive impact on volatility of the UK and the US stock markets. We also find that the implementation of lockdown policies provided by the governments reduced the effects of new mortality rates on stock market volatility. In addition, our results are robust to other measurements of volatility. Together our findings suggest that new mortality rates do matter for stock market volatility of these two markets, and lockdown policies mitigate market volatile caused by new mortality rates.