COVID-19 Infection Data, Policy Interventions or Sentiment: What Explains International Stock Returns and Volatility?

We examine the impact of COVID-19 (C-19) pandemic on global equity markets by constructing novel infection indices. Our results show that the impact of prompt and large-scale policy interventions is ambiguous yet statistically significant. However, in this equivocality, the impact of global measures of policy interventions is more pronounced than local counterparts. Furthermore, despite the significant connection between variables describing fundamental infection data and equity market changes, we conclude that equity markets have decoupled from adverse impacts of C-19 mortality and morbidity data since the announcement of the pandemic by the WHO. Finally, the most compelling finding of our work is that changes in international equity markets are best predicted by the changes in the sentiment for C-19 infections. This prediction remains significant even if we account for local and global infection data and policy variables as well as control variables that capture changes in the post-pandemic sample.