A catalyst to crisis: a quantitative analysis of the spread and manifestation of the COVID-19 pandemic in financial markets

Abstract

The profound implications of the COVID-19 crisis introduced significant challenges to global financial systems. As the pandemic proliferated around the globe, its magnitude, combined with the substantial economic responses from central banks, shaped a unique financial landscape propitious for investigation. This thesis contributes novel insights into the complex consequences of the COVID-19 pandemic, leveraging extensive datasets related to both the pandemic and financial markets. The thesis begins with an investigation into the explanatory power of pandemic-related data on stock market indices. Firstly, this research employs stepwise regression techniques on a diverse dataset of COVID-19 cases, accinations, and traditional financial market drivers to uncover the distinct and significant associations between pandemic data and market movements in 2020 and 2021. Following this, it utilizes event study statistical techniques to investigate the plethora of monetary policy responses implemented by central banks and the impact these had on the banking sector throughout 2020 and 2021. Segmenting each monetary policy into a distinct category, these emergency-driven interventions provide novel insights into the utility and efficacy of these tools and the reaction of financial markets in times of crisis. The research then progresses with a focus on individual stock market sectors and their unique responses to the pandemic. Using the Fama-French Five-Factor Model, stock returns are analysed in the context of common risk factors, including market risk, size, value, profitability, and investment. From this, it revealed the undercurrents that governed these industries amidst the broader market trends during the pandemic. Ultimately, the contributions of this research are manifold for a diverse range of stakeholders, including investors formulating strategies, policymakers creating emergency plans, and researchers aiming to enrich discussions on the intersection of global crises and financial markets.</p