Pandemic, policy, and markets: insights and learning from COVID-19’s impact on global stock behavior

Abstract The COVID-19 pandemic has triggered an unprecedented shock to global stock markets, exceeding the economic impacts of prior pandemics. This paper examines the pandemic’s impact on global stock markets across 34 countries, focusing on the relationship between the pandemic’s severity, government policy responses, and economic stimuli. Panel data regressions reveal that increased daily COVID-19 cases initially negatively impacted stock returns and increased volatility. Stringent government measures positively influenced market returns but also heightened volatility. The research challenges previous assumptions about the influence of geographical and economic factors on market reactions. By segregating the sample period by investor sentiment, the study finds a consistent pattern of negative lagged returns, indicating stronger mean reversion during high VIX periods. During low market volatility, government stringency measures are perceived as harmful to economic activity, negatively impacting stock returns. The insights from the COVID-19 pandemic can inform responses to future market disruptions from health crises, geopolitical tensions, environmental disasters, or other systemic shocks.