Investor behavior and stock market returns during Covid-19

Abstract

In recent years, the Covid-19 pandemic has had significant effects on stock markets worldwide as no sectors have been able to hide from it. This special time period has also highlighted the role of psychological phenomena that have been more visible now than before.

This thesis studies the behavior of two investor types and stock market returns during Covid-19 pandemic. The aim is to find long-term relationships between the variables and examine how coronavirus related information affected investor sentiment, VIX index, and stock market indices. Moreover, it examines whether different stock market indices reacted differently to covid-information.

The empirical research was conducted by using vector autoregressive (VAR) models. The data consists of weekly observations of the US market, ranging from January 2003 to January 2022. This large sample period enables to examine the long-term relationships and focusing on how coronavirus affected those. In addition to VAR models, two non-linear models were used to further investigate the possible time-varying relationships.

Results from VAR models show that individual investors base their decisions on history and do not react heavily to crises, whereas for institutional investors the opposite is true. The empirics suggest that stock market indices react especially to covid-deaths, and Standard & Poor’s 500 index and Standard & Poor’s 500 Value index also react to covid restrictions. The linearity tests imply that there are strong nonlinearities in the covid-information.

This study allows an insight not only to investor behavior but also to the behavior of different stock market indices during a crisis. This information could be useful for policy makers, and institutional and individual investors.