Stock Market Response Research Articles

Proximity to War: The Stock Market Response to the Russian Invasion of Ukraine

AbstractWe identify a “proximity penalty” in the stock market response to the Russian invasion of Ukraine: the closer countries are to Ukraine, the lower their equity returns in a four‐week window around the start of the war. This result holds even at the firm level within Ukraine's neighbors. Trade linkages explain two‐thirds of the proximity penalty. We attribute the remainder—1.1 percentage points in equity returns per 1,000 km of extra distance—to military disaster risk. Evidence from other financial data, geopolitical risk indicators, and aid flow statistics supports the relevance of military tail risk as a spillover channel.

Effects of draft Climate-related Financial Risks Disclosure Framework on stock returns

This study uses an event study and cross-sectional approach to examine the immediate effects of the Reserve Bank of India's Draft Climate-related Financial Risks Disclosure Framework on the stock market. The findings indicate investor apprehension through initial negative stock market response to the disclosure framework. The most affected sectors are the Automobile, Healthcare & Pharma, Information Technology, Media, Oil & Gas, and PSU Banks. Climate risk disclosure indirectly affected sectors reliant on banking. The Governance variable adversely influenced post-event returns. Findings also reveal investor confidence in larger, financially robust firms.

Moderating effects of technological innovation and information environment on market response to information disclosure reforms

Constructing an institutional environment centered around information disclosure (ID) is the direction of development for capital market reforms. This paper innovatively explores the stock market response (MR) to companies' enhanced ID due to institutional changes. Using data from Chinese companies listed on the Sci-Tech Innovation Board (STIB) from 2019 to 2023, the study employs Information Asymmetry Theory and Stakeholder Theory to analyze the relationship between ID levels and MR. The empirical analysis reveals a "U-shaped" relationship between ID level and MR. Furthermore, by introducing variables related to the information environment (IE) and technological innovation (TI), the study finds that their signaling effects vary among different audiences. High transparency in the IE and strong TI capabilities significantly mitigate the negative MR effects caused by revealing deficiencies during the enhancement of ID. This paper provides theoretical support and empirical evidence for capital market reform, improved financial regulation, enhanced credit quality of listed companies, and investor protection.

Stock market responses to economic sanctions: Evaluating the roles of national reserves and financial market access

Economic sanctions significantly influence stock market capitalization and have critical implications for the national economy. This study investigates the impact of economic sanctions on stock market capitalization, focusing on the roles of national reserves and financial market access in mitigating these effects, utilizing a sample of 87 countries from 2000 to 2021 and employing a two-step system generalized method of moments (GMM) approach to analyze panel data. The findings reveal that economic sanctions, including trade and financial sanctions, significantly reduce stock market capitalization. However, this negative impact diminishes over time as markets adapt. Moreover, higher national reserves and enhanced financial market accessibility can mitigate the adverse effects of sanctions. Case studies in Russia, Iran, China, and Ukraine further validate these results. This study refines economic models, such as the capital asset pricing model (CAPM) and country risk model (CRM), by including sanction intensity, national reserves, and financial market accessibility, offering valuable insights for policymakers and investors dealing with international sanctions.

The influence of European MiCa regulation on cryptocurrencies

This research investigates the relationship between impending regulatory measures, specifically the introduction of European MiCa regulations, and their influence on cryptocurrency markets. Analysing stock market responses, we highlight significant shifts in liquidity, variance, and return dynamics post-MiCa-related announcements. Specifically, such announcements are associated with significant negative cryptocurrency returns and elevated liquidity. The findings reveal defined heterogeneity across different cryptocurrency sub-classes, each uniquely affected by its inherent attributes and susceptibility to regulatory changes. This work offers insights into the nature of market responses to regulatory intervention, providing an invaluable perspective on the equilibrium between cryptocurrency market behaviour and the evolving European regulatory landscape.

Market resilience in turbulent times: a proactive approach to predicting stock market responses during geopolitical tensions

PurposeThe Indian stock market can be tricky when there's trouble in the world, like wars or big conflicts. It's like trying to read a secret message. We want to figure out what makes investors nervous or happy, because their feelings often affect how they buy and sell stocks. We're building a tool to make prediction that uses both numbers and people's opinions.Design/methodology/approachHybrid approach leverages Twitter sentiment, market data, volatility index (VIX) and momentum indicators like moving average convergence divergence (MACD) and relative strength index (RSI) to deliver accurate market insights for informed investment decisions during uncertainty.FindingsOur study reveals that geopolitical tensions' impact on stock markets is fleeting and confined to the short term. Capitalizing on this insight, we built a ground-breaking predictive model with an impressive 98.47% accuracy in forecasting stock market values during such events.Originality/valueTo the best of the authors' knowledge, this model's originality lies in its focus on short-term impact, novel data fusion and high accuracy. Focus on short-term impact: Our model uniquely identifies and quantifies the fleeting effects of geopolitical tensions on market behavior, a previously under-researched area. Novel data fusion: Combining sentiment analysis with established market indicators like VIX and momentum offers a comprehensive and dynamic approach to predicting market movements during volatile periods. Advanced predictive accuracy: Achieving the prediction accuracy (98.47%) sets this model apart from existing solutions, making it a valuable tool for informed decision-making.

The global risk trinity of hydrocarbon economies: Evidence from the method of moments quantile regression

This paper addresses the critical requirement to understand how global political and economic trends affect stock market dynamics in the Gulf Cooperation Council (GCC) region. Prompted by the region's economic dependency on oil and the growing integration of GCC markets into global financial systems, it investigates the impact of three global risk factors on both Islamic and conventional stock markets in the GCC: financial risk (US CDS and global interest rate volatility), commodity price risk (oil price volatility), and political risk (global geopolitical risk). The present research adopts the method of moments quantile regression to assess the asymmetrical effects of these risks across various market conditions from 2011 to 2021. The findings show significant disparities in stock market responses to global risks in bearish, bullish, and normal states, highlighting the nuances of market dynamics in the GCC. In the face of rising global hazards, Islamic assets may provide potential for portfolio diversification. Policy recommendations emphasize the necessity of incorporating global risk variables into investment strategies to reduce volatility and improve market stability in the GCC.

Stock market responses to unconventional monetary policy shocks

We assess the impact of forward guidance and large-scale asset purchases (LSAPs) on stock market returns, finding that LSAP shocks during unconventional periods affect stock returns in a manner similar to federal funds rate (FFR) shocks during conventional periods.

Stock market responses to Covid-19: Evidence from Jakarta Islamic Index

Stock market responses to Covid-19: Evidence from Jakarta Islamic Index

Recovering from geopolitical risk: An event study of Huawei's semiconductor supply chain

Amidst the ongoing globalisation of supply chains, geopolitical issues have emerged as a significant source of supply chain risk for firms. This has recently been illustrated in the trade sanctions adopted by the US against the Chinese semiconductor industry, particularly in the accessing of semiconductor chips. A notable event here, that we focus on in this paper, involves how the leading telecommunications company Huawei has been impacted by this and most interestingly how they have been able to respond, by being able to successfully launch new chip-based products during the US semiconductor chip technology blockade, despite the sanctions ban. This has been achieved with the support of key supplier, SMIC, who has become a major 7 nm chip supplier for Huawei. Employing the event study research method, this study initially examines the stock market's response to Huawei's new product release with these new SMIC-sourced semiconductor chips. It also appraises the propagation effects on Huawei's and SMIC's supply chain partners. This exposes the differential impact on the supply chain members of Huawei (focal firm) and SMIC (main supplier). The results reveal predominantly positive responses from Huawei's suppliers and customers, as well as SMIC's suppliers and customers, to these incidents, with Huawei's suppliers' and SMIC's suppliers' and customers' share prices responding positively to the release of Huawei's new product, exhibiting substantial median stock market reaction of 1.53%, 1.62%, and 2.52% on Day 0, respectively, it shows, in contrast, that Huawei's customers did not exhibit a positive share price reaction to the development of this newly sourced product. It is noteworthy that SMIC's supply of chips to Huawei has had a significantly positive impact on both Huawei and SMIC's suppliers and customers. With the impact varying across different roles within the supply chains, this study provides useful insights for understanding the propagation effect of good news in the supply chain resulting from firms' proactive action in response to imposed sanctions for a key supply component.

Comparative responses of renewable energy stock market to economic policy uncertainty and climate policy uncertainty shocks: Evidence from China

AbstractWith rising climate policy uncertainty (CPU) and economic policy uncertainty (EPU), it is crucial to analyze the factors influencing the renewable energy stock market (RE) from a comprehensive perspective. Using data from January 2009 to May 2022, we use a time‐varying parameter vector autoregressive model with stochastic volatility (TVP‐VAR‐SV) to examine CPU, EPU, macroeconomic factors, and RE in a unified framework. We analyze the various responses of RE to CPU and EPU. Furthermore, we test for differences in the impact of the four classifications of EPU on RE. The findings are as follows. The time‐varying impact of CPU on RE is centered on the short term and is positive during non‐crisis periods. In contrast, the impact of EPU on RE is negative in the short term. In addition, causal identification at the micro level reveals that RE can increase by 0.932% on average after being affected by CPU. Further comparing the four classifications of EPU, we find that exchange rate policy uncertainty has the largest negative impact. Our study enriches the investment theory on RE. It avoids biased interpretations of various policy uncertainties and has a significant implication for policymakers, renewable energy firms, and investors.

Economic policy uncertainty and Indian equity sectors: a quantile regression approach

PurposeThis paper aims to investigate the effect of economic policy uncertainty (EPU) shocks on Indian equity market sectors. The effect of domestic (Indian) and foreign (USA) EPU shocks is examined on ten major Bombay Stock Exchange sectors.Design/methodology/approachThe study uses data covering the period from September 2005 to July 2023 and uses the methodology of quantile regression to investigate the heterogenous response of stock market sectors under diverse market conditions explained through the analysis of conditional quantiles distribution.FindingsThe results demonstrate that domestic and foreign EPU shocks negatively affect most of the sectors in bearish market conditions. Industrials, commodities, utilities, consumer discretionary and financial services are the most affected sectors by domestic EPU. However, the information technology sector is found to be immune to domestic EPU shocks but negatively affected by foreign EPU shocks. On the other hand, energy, financial services and fast-moving consumer goods sectors are found to be immune to foreign EPU shocks but are negatively affected by domestic EPU shocks.Practical implicationsUnderstanding the heterogeneous response of different sectors to EPU shocks could help investors and portfolio managers identify portfolio diversification opportunities.Originality/valueThis study makes an inaugural attempt to examine the responses of Indian stock market sectors to domestic and foreign EPU shocks using the approach of quantile regression and unveils the previously unexamined diverse reactions of Indian stock market sectors to EPU shocks originating from both India and USA.

When does digital merger and acquisition create shareholder value? An empirical investigation in the Chinese context

In China, acquiring firms are increasingly focused on the immediate financial returns that digital mergers and acquisitions (DM&A) can help them achieve in the stock market, but there is little literature that examines which acquiring firms achieve greater returns. Based on signaling theory, this study conceptualizes DM&A announcements as signals released by the acquiring firms to the stock market and explores the factors influencing the Chinese stock market's reaction to such signals. This research empirically investigates potential influencing factors using a short-term event methodology together with regression analysis based on the data collected in China's Shanghai and Shenzhen stock markets during 2012–2021. The research finds that the Chinese stock market reacts more positively to DM&A announcements for acquiring firms with high executive shareholdings, high executive openness, strong digital innovation capabilities, and in regions with higher levels of investor protection. This study is the first attempt to explore the factors influencing the stock market's response to DM&A in the Chinese context.

Vaccine Progress, Stock Prices, and the Value of Ending the Pandemic

One measure of the ex ante cost of disasters is the welfare gain from shortening their expected duration. We introduce a stochastic clock into a standard disaster model that summarizes information about progress (positive or negative) toward disaster resolution. We show that the stock market response to duration news is essentially a sufficient statistic to identify the welfare gain to interventions that alter the state. Using information on clinical trial progress during 2020, we build contemporaneous forecasts of the time to vaccine deployment, which provide a measure of the anticipated length of the COVID-19 pandemic. The model can thus be calibrated from market reactions to vaccine news, which we estimate. The estimates imply that ending the pandemic would have been worth from 5% to 15% of total wealth as the expected duration varied in this period. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00863 .

STOCK MARKET RESPONSE TO METEOROLOGICAL DISASTER RISK: FROM LIQUIDITY PERSPECTIVE

This study investigates the impact of meteorological disaster risk perception on stock liquidity of Chinese listed companies by constructing meteorological disaster risk perception indicators through the Baidu index. Empirical evidence reveals that an increase in meteorological disaster risk perception decreases investors’ risk appetite and increases investors’ loss aversion, which in turn negatively affects stock liquidity. In addition, the increase in meteorological disaster risk perception also shrinks stock trading volume by reducing investor sentiment. The negative effect of meteorological disaster risk perception on stock liquidity is more pronounced in summer and winter and for firms located in water-rich areas. The findings of this study provide empirical evidence from investors’ perspective for understanding the impact of meteorological disasters on stock market liquidity.

Impact of COVID-19 Travel Subsidies on Stock Market Returns: Evidence from Japanese Tourism Companies

This study examines stock market response (SMR) to the Japanese tourism industry (TI) after the government’s announcement of travel subsidies (TRSs) during the COVID-19 pandemic in 2020, using a sample comprising 80 listed Japanese firms in the TI and an event study method (ESM) to determine the impact of government policy responses (GPRs) to the pandemic. This study found that investors in the TI reacted positively to the announcement of subsidies; this positive effect persisted for 50 trading days after the announcement but was weaker for transportation firms. The results suggest that TRSs are important for the TI, with a stronger link to travel-related firms, such as airlines and travel agencies, hotels, and amusement services. However, investors in the TI reacted negatively to policies that directly addressed the pandemic, such as social distance policies (SDPs). These results are robustly confirmed when we measure abnormal returns by using a three-factor model. The results offer useful insights for policymakers and practitioners aiming to mitigate economic loss from disasters such as the COVID-19 pandemic.

Stock market response to natural disasters: Does corporate sustainability performance make difference?

This study aims to examine the short-term price reactions of the stocks listed on Borsa Istanbul (BIST) after the severe earthquake of February 6, 2023, that happened in the southeastern region of Türkiye covering 11 provinces and causing more than 50,000 fatalities. Using a sample of 450 companies listed on the BIST All Index, this study estimates the abnormal returns (ARs) of stocks by employing an event study methodology. Using BIST 100 companies as a sub-sample, this study also explores whether sustainability performance creates resilience against downside risk after the earthquake. The results of the market model and the mean-adjusted model show that on the event day, most of the sectors had negative and significant ARs, while only the non-metal mineral products had positive and significant ARs. Most of the sectors continued to decline in the following 10 days except basic metal and non-metal mineral products sectors. The telecommunications sector was the most negatively affected sector in both models after the event day as it has underperformed in ensuring uninterrupted access to communication. The findings also indicate that firms in the financial sector that have higher sustainability performance are more resilient in responding to the disaster.

Exploring the use of emotional sentiment to understanding market response to unexpected corporate pivots

This article studies the influence of social media sentiment on stock prices, focusing on significant shifts by Eastman Kodak. Utilising a unique emotion-based lexicon, the research indicates that social media sentiment immediately reflects stock market responses to major corporate changes. The sentiment techniques used align with the timeline of Kodak’s announcements. Excitement was found to have the greatest impact on Kodak’s prices. However, emotions like anxiety, panic, and revulsion indicated a notable negative social media reaction. The study cautions against the potential volatility in the market when many investors react to the same dubious information. These findings emphasise the significance of adhering to legal and regulatory standards in corporate governance and advocate for transparency and accountability in policy-making for a more reliable financial system.

Long-Term Orientation and Tax Avoidance Regulations

In this paper, we explore the relationship between the culture of the country where a multinational corporation (MNC) is headquartered and the MNC’s stock market reaction to tax avoidance regulations. Specifically, we examine the different responses of MNCs following the implementation of the 2010 UK reform that restricted profit shifting for a specific group of firms. We find that, in countries with short-term-oriented cultures, MNCs affected by this reform experienced positive stock market responses relative to their unaffected counterparts. This is not found in long-term-oriented cultures. This difference in response can partly be explained by the differing perceptions of the role tax havens play in tax minimization practices between more long-term-oriented cultures and those oriented towards the short term. We provide evidence that investors from more future-oriented cultures may recognize the short-lived effectiveness of a regulation ex ante, and thus price the quasi-exogenous market shock differently than their more short-term-oriented counterparts.

Political protection: The case of large‐scale oil spills and the stock prices of energy firms

AbstractIn this study, we utilize a sample of publicly traded US energy firms to investigate the stock market responses to 40 large‐scale oil spills. Our findings reveal that the stock prices of extraction and refining firms experience significant declines during the periods surrounding these oil spill incidents, and energy pipeline firms exhibit a relatively smaller decrease. These results underscore the risk exposure shared by all energy firms, irrespective of their direct involvement in the oil spill incident. Furthermore, our study uncovers an intriguing dynamic—the influence of political connections established through lobbying activities. We observe that these political ties serve to significantly mitigate the negative market reactions to oil spills. Our results suggest that, from the market's perspective, firms with political connections are less vulnerable to the impending costs associated with oil spills when compared to their non‐politically connected counterparts.