Does COVID 19 Impact Market Sentiment and Stock Returns?- Evidence from India

Abstract

This article examines the impact of COVID-19 on market sentiment and stock market returns for firms listed in India using daily data from January 2020 to May 2021, a period that includes the first and second wave of the COVID-19 pandemic. We applied wavelet coherence to explore the co-movement of COVID-19 and sentiment. Market-related implicit sentiment proxies depicting the market's bullish sentiment negatively correlate with COVID-19, whereas sentiment proxies representing the market's bearish sentiment positively correlate with COVID-19 during the first wave of the pandemic. No co-movement was found between sentiment proxies and COVID-19 during the second wave of the pandemic. We also applied event study methodology to measure abnormal returns and regression analysis to explain the causes of abnormal returns during both the pandemic waves. We found statistically significant negative abnormal returns during wave 1 of COVID-19 due to increased negative sentiment in the market. During wave 2, we did not find abnormal returns to be statistically significant. We also found that during wave 1, return on assets (ROA) is statistically associated with abnormal returns, while during wave 2, no firm-specific characteristic is statistically associated with abnormal returns. These findings are among the first empirical evidence of COVID-19, market sentiment, and stock market returns during wave 1 and wave 2 of the pandemic.