Did the Indian stock market overreact to Covid-19?

Abstract

Several studies have used event studies to determine the impact of events such as war or pandemics on individual stocks. However, standard event study methodologies assume that the event does not affect the market index. Our study introduces a framework that aims to aid in interpreting event study findings, particularly in evaluating the effects of widespread factors such as pandemics or wars on individual stocks. We then use this framework to understand the impact of Covid-19 on stock prices in India.We examine the returns of stocks from sectors that were adversely affected and those that benefitted (or did not suffer) during the pandemic. Usingthedaily returns ofIndian companies, we find that the returns on stocks from both sectors fell during the pandemic before the returns started increasing for the safe sectors. We find that this happens because the entire index fell after the event. After we adjusted for this, we found that the safer stocks generated positive abnormal returns while the riskier stocks generated negative abnormal returns during this period. We also find that the market overreacted initially but started correcting itself after eight trading days.