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COVID-19 and U.S. Stock Returns

| | Posted in: Animal Spirits, Equity Premium

What does the U.S. stock market at industry/firm levels say about investor expectations during and after the 2019 coronavirus (COVID-19) pandemic? In the April 2020 update of their paper entitled "Feverish Stock Price Reactions to COVID-19", Stefano Ramelli and Alexander Wagner examine and interpret industry/firm-level reactions to COVID-19 across three pandemic phases:

  1. Incubation: January 2-17,
  2. Outbreak: January 20-February 21,
  3. Fever: February 24-March 20.

They estimate each stock's abnormal return during these phases as its 1-factor (market) alpha minus its beta times the market excess return. They estimate alpha and beta via regression of daily excess stock returns on daily excess value-weighted market returns during 2019. They use the yield on 1-month U.S. Treasury bills (T-bill) as the risk-free rate for calculating excess return. Using daily dividend-adjusted stock prices for Russell 3000 stocks (excluding financial stocks for leverage-related analyses), market returns and T-bill yields during December 31, 2018 through March 20, 2020, they find that:

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