A Research on Cross-sectional Return Dispersion and Volatility of US Stock Market during COVID-19

TL;DR

This study examines how COVID-19-related uncertainty influenced volatility and return dispersion in the US stock market, revealing that increased epidemic severity and return dispersion raised volatility, while the epidemic negatively impacted energy sector returns.

Contribution

The paper introduces the use of Google search indices to proxy COVID-19 impact and models its effect on stock market volatility and return dispersion during the pandemic.

Findings

Epidemic severity and return dispersion both significantly increase volatility.

COVID-19 negatively impacts the energy sector's returns.

No evidence of herding behavior was found during the pandemic.

Abstract

We studied the volatility and cross-sectional return dispersion effect of S&P Health Care Sector under the covid-19 epidemic. We innovatively used the Google index to proxy the impact of the epidemic and modeled the volatility. We also studied the influencing factors of the log-return of S&P Energy Sector and S&P Health Care Sector. We found that volatility is significantly affected by both the epidemic and cross-sectional return dispersion, and the coefficients in front of them are all positive, which means that the herding behaviour did not exist and as the cross-sectional return dispersion increases and the epidemic becomes more severe, the volatility of stock returns is also increasing. We also found that the epidemic has a significant negative impact on the return of the energy sector, and finally we provided our suggestions to investors.