Stock Return Reaction to Covid-19 Pandemic: an Empirical Study

Abstract

The purpose of this research is to provide a study of how stock return response to COVID-19 pandemic. Using the semi-strong form of the Efficient Market Hypothesis, the abnormal return draws immediate reaction of stock market return after the announcement of COVID-19 pandemic by the World Health Organization on January 20, 2020. This research study company performances within the S&P500 Index taken 200 trading days before COVID-19 declared as a pandemic. This research select companies listed in the S&P500 Index because it represents the best-performing companies in the U.S and captured a foreseeable risk and return. The research sample consists of 5 industries; each represents by five companies meeting the sampling criteria by random sampling. Regression analysis uses to derive the value of the alpha and beta coefficient with daily stock return as the dependent variable and market daily return as the independent variable. Output value of the Abnormal Return (AR) for daily trading after the announcement then calculated using regression and use as the proxy to analyze stock returns after the COVID-19 pandemic. The result of AR then averaged into so-called Average Abnormal Return (AAR). This research uses descriptive analysis, regression analysis, and hypothesis test for data testing and analysis. This study showing a result of no evidence that the market is efficient reacting to COVID-19 pandemic under a semi-strong form of EMH. The result is backed by the significant value of Standardized Cumulative Abnormal Return (SCAR) on the observed trading days.