Dynamic changes in US Financial Markets under the COVID-19 Pandemic

Abstract

Covid-19 disrupted people’s lives and the world’s economic activities in major ways. The pandemic affected, businesses, companies, and investors in the stock market. This paper aims to how normalized Covid-19 affect the United States stock market by analyzing three major US stock markets: S&P500, NASDAQ, and DJIA. The aim was to examine the effect on stock market’s return and volatility. To analyze the impact of the pandemic, vector autoregression models (VAR) as well as the ARMA-GARCH-X model were used. Impulse response function graph from the VAR model revealed that the pandemic did increase or decrease the stock market returns of either of the indices. However, fluctuations in returns were shown to be higher during the early period but faded with time. The ARMA-GARCH-X model however reported that the pandemic only influenced the volatility of S&P500 returns only while the other two markets were not affected. Conclusion drawn from the study is that the pandemic influenced the stock markets in the early days but its influence tapered down due to normalization of the pandemic in the mind of investors. Government responses to the pandemic as well as the introduction of vaccines could also serve to raise investor’s confidence thus reducing the influence of the pandemic on the stock market.