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A note on the relationship between COVID-19 and stock market return: evidence from South Asia

Md Arafat Rahman (Department of Economics, Macquarie University, North Ryde, Australia)
Md Mohsan Khudri (Department of Economics, Fogelman College of Business and Economics, The University of Memphis, Memphis, Tennessee, USA)
Muhammad Kamran (School of Business and Law, Edith Cowan University, Joondalup, Australia)
Pakeezah Butt (School of Business and Law, Edith Cowan University, Joondalup, Australia)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Article publication date: 30 August 2021

Issue publication date: 19 April 2022

695

Abstract

Purpose

The transformation of coronavirus disease (COVID-19) from a regional health crisis in a Chinese city to a global pandemic has caused severe damage not only to the natural and economic lives of human beings but also to the financial markets. The rapidly pervading and daunting consequences of COVID-19 spread have plummeted the stock markets to their lowest levels in many decades especially in South Asia. This concern motivates us to investigate the stock markets’ response to the COVID-19 pandemic in four South Asian countries: Bangladesh, India, Pakistan and Sri Lanka. This study aims to investigate the causal impact of the number of confirmed COVID-19 cases on stock market returns using panel data of the countries stated above.

Design/methodology/approach

This study collects and analyzes the daily data on COVID-19 spread and stock market return over the period May 28, 2020 to October 01, 2020. Using Dumitrescu and Hurlin panel Granger non-causality test, the empirical results demonstrate that the COVID-19 spread measured through its daily confirmed cases in a country significantly induces stock market return. This paper cross-validates the results using the pairwise Granger causality test.

Findings

The empirical results suggest unidirectional causality from COVID-19 to stock market returns, indicating that the spread of COVID-19 has a dominant short-term influence on the stock movements. To the best of the knowledge, this study provides the first empirical insights into the impact of COVID-19 on the stock markets of selected South Asian countries taking the cross-sectional dependence into account. The results are also in line with the findings of other existing literature on COVID-19. Moreover, the results are robust across the two tests used in this study.

Originality/value

The findings are equally insightful to the fund managers and investors in South Asian countries. Taking into account the possible impact of COVID-19 on stock markets’ returns, investors can design their optimal portfolios more effectively. This study has another important implication in the sense that the impact of COVID-19 on the stock markets of South Asian countries may have spillover effects on other developing or even developed countries.

Keywords

Acknowledgements

The authors acknowledge the contributions of the Dadax and Datastream teams for making the data publicly available. The authors also thank anonymous referees and editors for their helpful comments. Nevertheless, we are solely responsible for errors, if any exist. Funding: This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. Disclosure statement: We hereby confirm that there are no known conflicts of interest associated with this publication.

Citation

Rahman, M.A., Khudri, M.M., Kamran, M. and Butt, P. (2022), "A note on the relationship between COVID-19 and stock market return: evidence from South Asia", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 15 No. 2, pp. 359-371. https://doi.org/10.1108/IMEFM-03-2021-0124

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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