The impact of COVID-19 on the stock market crash risk in China

• Published in: Research in international business and finance Vol. 57; p. 101419
• Main Authors: Liu, Zhifeng, Huynh, Toan Luu Duc, Dai, Peng-Fei
• Format: Journal Article
• Language: English
• Published: United States Elsevier B.V 01.10.2021
• Subjects: COVID-19; Fear sentiment; Full length; Investor sentiment; Skewness; Stock market crash risk; COVID-19; Fear sentiment; G10; G32; Skewness; Investor sentiment; Stock market crash risk
• ISSN: 0275-5319; 1878-3384; 1878-3384
• DOI: 10.1016/j.ribaf.2021.101419

•The impact of COVID-19 epidemic on the Chinese stock market crash risk.•The predictive power of fear sentiment and pandemic status on the market crash risk.•The construction of fear sentiment from Baidu index.•There exists the interaction effects between fear sentiment and pandemic status on market crash risk.•Our results remain robust when substituting the different proxy. This study investigates the impact of the COVID-19 pandemic on the stock market crash risk in China. For this purpose, we first estimated the conditional skewness of the return distribution from a GARCH with skewness (GARCH-S) model as the proxy for the equity market crash risk of the Shanghai Stock Exchange. We then constructed a fear index for COVID-19 using data from the Baidu Index. Based on the findings, conditional skewness reacts negatively to daily growth in total confirmed cases, indicating that the pandemic increases stock market crash risk. Moreover, the fear sentiment exacerbates such risk, especially with regard to the impact of COVID-19. In other words, when the fear sentiment is high, the stock market crash risk is more strongly affected by the pandemic. Our evidence is robust for the number of daily deaths and global cases.