Greenland examines aggregate equity market returns during pandemics

Assistant Professor of Economics Andrew Greenland’s research looks at the U.S. equity market reactions to the COVID-19 pandemic in real time.

Research co-authored by Andrew Greenland, assistant professor of economics in the Martha and Spencer Love School of Business, provides a potential rationale for how investors are incorporating new information about COVID-19, in real time.

headshot of Andrew Greenland
Andrew Greenland, assistant professor of economics

In “Aggregate and Firm-Level Stock Returns During Pandemics, in Real Time,” Greenland and co-authors Laura Alfaro, Harvard Business School, Anusha Chari, University of North Carolina at Chapel Hill, and Peter K. Schott, Yale School of Management, demonstrate daily aggregate and firm-level stock returns respond to unexpected changes in the trajectory of COVID-19 infections at a daily frequency.

“The decline in stock prices and volatility we saw through mid-March coincides with a lot of uncertainty about that trajectory,” Greenland explains. “In the early days of the outbreak, the estimated trajectory is very sensitive to daily reported infections. If daily case counts were higher than models had previously predicted, investors revised upwards their assessment of potential economic damage and markets opened down. Conversely, if cases grew by less than expected (even if cases grew by a lot), markets opened up.”

The co-authors created the following two GIFs to demonstrate how this played out in real time.

COVID-19 Cases vs US Stock Market Close

Here market returns seem to be detached from the total number of cases, but one can see that as the growth slows, the market’s recovery begins (easier to observe in log scale on the bottom panel).

COVID-19 Forecasts vs US Stock Market Close

This shows the change in forecasts (and confidence intervals) and their relationship to the market directly. The top panel shows forward looking case projections (in the pink cone) and the black dashed line indicates the change in those projections after the market closes each day. The bottom panel relates these changes in projections to the Wilshire 5000 index (an aggregate of all publicly traded stocks in the US). The large moves in the market (up or down) coincide with downward and upward revisions of case forecasts. After March 25, estimated case trajectory stabilizes and volatility starts to come down.

“Aggregate and Firm-Level Stock Returns During Pandemics, in Real Time” was released on the National Bureau of Economic Research’s website as a working paper and was published in Covid Economics, Vetted and Real-Time Papers, a new journal from the Centre for Economic Policy Research (CEPR) focused on disseminating emerging scholarly work on COVID-19 to improve the knowledge base for academics and policymakers.

The co-authors presented their work on May 5 in the inaugural online seminar of the Covid Economics series hosted by CEPR and the Graduate Institute, Geneva.