The impact of COVID-19 on the stock market crash risk in China

Zhifeng Liu; Toan Luu Duc Huynh; Peng-Fei Dai

doi:10.1016/j.ribaf.2021.101419

The impact of COVID-19 on the stock market crash risk in China

Res Int Bus Finance. 2021 Oct:57:101419. doi: 10.1016/j.ribaf.2021.101419. Epub 2021 Apr 9.

Authors

Zhifeng Liu^{1

2}, Toan Luu Duc Huynh^{3

4

5}, Peng-Fei Dai⁶

Affiliations

¹ Management School, Hainan University, Haikou, China.
² Supply Chain and Logistics Optimization Research Center, University of Windsor, Windsor, Canada.
³ University of Economics Ho Chi Minh City, Ho Chi Minh City, Viet Nam.
⁴ IPAG Business School, Paris, France.
⁵ Chair of Behavioral Finance, WHU - Otto Beisheim School of Management, Vallendar, Germany.
⁶ School of Business, East China University of Science and Technology, Shanghai, China.

Abstract

This study investigates the impact of the COVID-19 pandemic on the stock market crash risk in China. For this purpose, we first estimated the conditional skewness of the return distribution from a GARCH with skewness (GARCH-S) model as the proxy for the equity market crash risk of the Shanghai Stock Exchange. We then constructed a fear index for COVID-19 using data from the Baidu Index. Based on the findings, conditional skewness reacts negatively to daily growth in total confirmed cases, indicating that the pandemic increases stock market crash risk. Moreover, the fear sentiment exacerbates such risk, especially with regard to the impact of COVID-19. In other words, when the fear sentiment is high, the stock market crash risk is more strongly affected by the pandemic. Our evidence is robust for the number of daily deaths and global cases.

Keywords: COVID-19; Fear sentiment; Investor sentiment; Skewness; Stock market crash risk.