Profiting on the Stock Market in Pandemic Times: Study of COVID-19 Effects on CESEE Stock Markets

Tihana Škrinjarić

doi:10.3390/math9172077

Abstract

This research deals with stock market reactions of Central Eastern and South Eastern European (CESEE) markets to the COVID-19 pandemic, via the event study methodology approach. Since the stock markets react quickly to certain announcements, the used methodology is appropriate to evaluate how the aforementioned markets reacted to certain events. The purpose of this research was to evaluate possibilities of obtaining profits on the stock markets during great turbulences, when a majority of the participants panic. More specifically, the contrarian trading strategies are observed if they can obtain gains, although a majority of the markets suffer great losses during pandemic shocks. The contributions to the existing literature of this research are as follows. Firstly, empirical research on CESEE stock markets regarding other relevant topics is still scarce and should be explored more. Secondly, the event study approach of COVID-19 effects utilized in this study has (to the knowledge of the author) not yet been explored on the aforementioned markets. Thirdly, based on the results of CESEE market reactions to specific announcements regarding COVID-19, a simulation of simple trading strategies will be made in order to estimate whether some investors could have profited in certain periods. The results of the study indicate promising results in terms of exploiting other investors’ panicking during the greatest decline of stock market indices. Namely, the initial results, as expected, indicate strong negative effects of specific COVID-19 announcements on the selected stock markets. Secondly, the obtained information was shown to be useful for contrarian strategy in order to exploit great dips in the stock market indices values.

Highlights

Published: 27 August 2021As of today, much research exists on the novel coronavirus (COVID-19 henceforward), which examines effects on the stock markets, economies, health institutions, and overall human health [1,2,3,4,5,6]
Based on the results of Central Eastern and South Eastern European (CESEE) market reactions to specific announcements regarding COVID-19, a simulation of simple trading strategies will be made in order to estimate whether some investors could have profited in certain periods
As more than 300 different factors affect stock price movements [7], news and events such as epidemics and pandemics affect the financial markets, as already previously documented ([8], see later in text; [9], who estimated that total costs of the SARS outbreak would be 1.5% of China’s GDP; [10], who developed a single country Computable General Equilibrium model to estimate the economic impact of pandemic influenza; [11], implications of HIV/AIDS for government finance and public services), as well as what could be done regarding future pandemics and epidemics [12]

Summary

Introduction

Published: 27 August 2021As of today, much research exists on the novel coronavirus (COVID-19 henceforward), which examines effects on the stock markets, economies, health institutions, and overall human health [1,2,3,4,5,6]. Since stock markets react more quickly to the economic, political, social, and other (un)expected events, the bulk of literature that focuses on short- and long-term effects of the COVID-19 happenings has been growing rapidly. Stock market reactions to pandemic news could be classified in the field of behavioral finance, whose roots start in [13,14,15,16,17]. This is due to investors’ under-reaction and overreactions to different news, which has a consequence of different stock market movements

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Conclusion