Pandemic-induced fear and stock market returns: Evidence from China

Zhi Su, Peng Liu and Tong Fang

Global Finance Journal, 2022, vol. 54, issue C

Abstract: We construct a pandemic-induced fear (PIF) index to measure fear of the COVID-19 pandemic using Internet search volumes of the Chinese local search engine and empirically investigate the impact of fear of the pandemic on Chinese stock market returns. A reduced-bias estimation approach for multivariate regression is employed to address the issue of small-sample bias. We find that the PIF index has a negative and significant impact on cumulative stock market returns. The impact of PIF is persistent, which can be explained by mispricing from investors' excessive pessimism. We further reveal that the PIF index directly predicts stock market returns through noise trading. Investors' Internet search behaviors enhance the fear of the pandemic, and pandemic-induced fear determines future stock market returns, rather than the number of cases and deaths caused by the COVID-19 pandemic.

Keywords: Pandemic; Fear; Stock market returns; Reduced-bias estimator; Internet search volume (search for similar items in EconPapers)
JEL-codes: C22 F37 G10 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:54:y:2022:i:c:s1044028321000429

DOI: 10.1016/j.gfj.2021.100644

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