GARCH Effect and Abnormal Returns during COVID-19 Pandemic

Considering that in general stock returns display time-varying volatility, researchers focus on how abnormal returns are calculated because it impacts on how it will be interpreted. This study uses a market model for the GARCH effect to obtain a more efficient estimation result. Using the sample of bank stocks, we empirically investigate how this adjustment impacts the magnitude of the abnormal return associated with the COVID-19 event. The results show that the calculation of abnormal returns taking into account the GARCH effect results in a more widespread than OLS. It suggests that the traditional market model should be sharpened for conditional heteroscedasticity when calculating abnormal returns during the COVID-19 outbreaks.