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

TL;DR

This paper examines how COVID-19 and associated fear sentiment increased stock market crash risk in China, using GARCH models and a fear index, with findings showing heightened risk linked to pandemic severity and fear levels.

Contribution

It introduces a novel analysis of COVID-19's impact on stock crash risk using a GARCH-S model and a COVID-19 fear index specific to China.

Findings

COVID-19 increases stock market crash risk.

Fear sentiment amplifies the pandemic's impact on risk.

Robust results with daily death and global case data.

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.