Covid-19 based Global fear index, economic fundamentals and stock return nexus: analysis of Asia - Pacific stock markets

Abstract

In this paper, we examine the effect of Covid-19 on stock returns of nine major Asia-Pacific countries, namely, Australia, China, Hong Kong, India, Japan, Taiwan, Malaysia, Singapore, and Thailand. We use the newly developed Covid-19 based global fear index to empirically estimate its effect on stock returns for the period 2 February up to 29 November 2020. The empirical analysis shows evidence of a cointegrating relationship between the global fear index and stock returns for nine countries. The findings reveal that the global fear index has a negative and significant effect on stock returns both in the long run and short run. We also find that accounting for economic fundamentals (the exchange rate and oil price) during the crisis period also influences the stock returns significantly. Shareholders need to consider the extent of uncertainty related to pandemics before making investment decisions in stock markets and possibly in other financial markets