Global Stock Markets during Covid-19: Did Rationality Prevail?

Abstract

This study assesses the validity of the Efficient Markets Hypothesis (EMH) during the Covid-19 period by evaluating whether various stock markets around the world accurately predicted economic performance in their respective countries. The underlying premise is that stock prices should discount future company cash flows, and the projection of these cash flows can be proxied by investors' ability to forecast macroeconomic conditions. We assess stock market performance from January 2020 to February 2022 in 16 countries, equally split between developed and emerging markets. While results varied, the study suggests that stock markets generally predicted economic activity during Covid-19. The modeling test indicated that stock markets significantly predicted economic activity in 11 out of 16 countries, particularly in developed markets. Furthermore, incorporating the stock market as a variable, improved economic forecasts in all 16 countries. Unlike other studies that mainly focused on the characteristics of share price movements, this research judges the rationality of stock markets against an external criterion. Ultimately, it suggests that EMH was mostly vindicated during the Covid-19 period.