Journal Pre-proof

Asymmetric dependence between stock market returns and news

during COVID19 financial turmoil

Cosmin-Octavian Cepoi Conceptualization; Methodology; Data curation; Software; Writing- Original draft preparatio

PII: S1544-6123(20)30591-2
DOI: https://doi.org/10.1016/j.frl.2020.101658
Reference: FRL 101658

To appear in: Finance Research Letters

Received date: 27 April 2020

Revised date: 10 June 2020
Accepted date: 16 June 2020

Please cite this article as: Cosmin-Octavian Cepoi Conceptualization; Methodology; Data curation; Software; Writin
Asymmetric dependence between stock market returns and news during COVID19 financial turmoil,
Finance Research Letters (2020), doi: https://doi.org/10.1016/j.frl.2020.101658

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Highlights

 I investigate the stock market’s reaction to coronavirus news in the top six most affected
countries by the pandemic.
 The fake news exerts a negative nonlinear influence on the inferior and the middle quantiles
throughout the distribution of returns.
 The media coverage leads to a decrease in returns across middle and superior quantiles and
has no effects on the inferior ones.
 During COVID19 turmoil superior quantiles of returns distribution exhibit negative
dependence on past performances, while inferior and middle quantiles are not affected by
this phenomenon.
 The gold return has a positive correlation with the stock markets, which amplifies during
extreme bearish and bullish periods indicating that it does not behave as a “Safe Havens”
asset.
 Asymmetric dependence between stock market returns and news during COVID19
financial turmoil

Author:

Cosmin-Octavian Cepoi a, Bucharest University of Economic Studies - Money and Banking

Department and CEFIMO, E-mail: [email protected]; Phone: +40720584799
a Corresponding author Address: Bucharest University of Economic Studies, 5-7 Mihail Moxa Street,
District 1, 010961, Bucharest, Romania.
 1. Introduction

The impact of public news sentiment on stock returns has received increasing attention in
recent years. A growing body of empirical and theoretical studies has focused on understanding
whether price movements in financial markets are driven by economic or political news (Smales,
2014; Broadstock and Zhang, 2019; Shi and Ho, 2020). The consensus is that the information
arriving from social media channels exerts a significant influence on the stock market dynamic,
especially in times of economic or political uncertainty.

Given the COVID-19 pandemic and the considerable amount of related news, stock markets
around the world have suffered enormous losses in the first three months of 2020. According to
Bloomberg, “through 1 p.m. on March 18, the S&P 500 index was off 27% for the year to date,
Germany’s DAX was down 38% and Japan’s Nikkei was off 29%.” Consequently, the governments
around the world have undertaken a series of stimulus packages to offset the damages produced by
the pandemic and to regain investor’s confidence. Although the major stock market indexes have
partially recovered in the middle of April 2020, a great deal of financial uncertainty remains.

While the current literature relating the COVID 19 pandemic to financial markets is limited, the
existing studies have provided some very interesting results. For example, Corbet et al. (2020a)
reveal a negative knock-on impact from the coronavirus on some companies with similar names. In
addition, Akhtaruzzaman et al. (2020), show that listed firms across China and G7 countries have
experienced significant increases in the conditional correlations for the market returns. This fact is
confirmed by Okorie and Lin (2020) which found considerable fractal contagion on the market
return and market volatility. Moreover, Conlon and McGee (2020) and Goodell and Goutte
(2020) suggest that cryptocurrencies do not act like safe havens during COVID 19 turmoil.

In this paper, I contribute to the literature by investigating the stock market’s reaction to
coronavirus news in the top six most affected countries by the pandemic1. By employing a panel
quantile regression model, I show that the stock markets present asymmetric dependencies with
COVID-19 related information. Specifically, the fake news exerts a negative influence on the lower
and the middle quantiles throughout the distribution of returns; however, their impact is not
statistically significant for the extreme values. Moreover, the media coverage leads to a decrease in

1I select the USA, the UK, Germany, France, Spain and Italy, considering the high number of persons infected
with COVID-19. On 21 April 2020, the countries mentioned above were the only ones with more than
100.000 total cases according to Worldometer https://www.worldometers.info/coronavirus/ .
returns across middle and upper quantiles and has no effects on the lower ones. Similarly, the
financial contagion across companies is detrimental to returns from 50 th to 75th quantiles.
Furthermore, the estimates show that the gold price dynamic has a nonlinear impact on equity
markets, especially during extreme bearish and bullish markets. The rest of the paper has the
following structure: Section 2 presents the data, Section 3 discusses the econometric approach, and
the results are in Section 4. Section 5 concludes the paper.

2. The data

To investigate the impact exerted by COVID19-related news on stock market return, I use a
balanced panel covering 50 working days, from 3 February 2020 to 17 April 2020. The dependent
variable includes daily returns of DJIA, FTSE 100, DAX, CAC 40, IGBM, and MIB. The choice of this
sample displays some disadvantages since the dynamic of stock indexes was influenced by the same
global event, i.e., the COVID19 pandemic, which thereby causes dependence between individual
countries in the panel2. Zhang et al. (2020) confirm this empirical fact when investigating the
correlation across the top 12 major stock markets before and after the World Health Organization
declared COVID-19 to be a worldwide pandemic. According to them, “the correlations in February
are relatively low, but they increase substantially upon entering March.” Additional details of the
correlation matrix during the analyzed period are in Table 1.

Table 1. Correlation coefficients of stock market returns

USA UK Germany France Spain Italy

USA 1.0000

UK 0.6082 1.0000

Germany 0.5314 0.7567 1.0000

France 0.5673 0.8122 0.8531 1.0000

Spain 0.4971 0.7224 0.7600 0.7731 1.0000

Italy 0.4465 0.6751 0.7290 0.7322 0.7633 1.0000

The COVID19 news-related variables come from the RavenPack analytics tool. This platform
provides real-time media analytics, which explores announcement describing essential issues
linked to the Coronavirus pandemic, such as panic, media hype, and fake news. It covers sources

2 Breusch and Pagan (1980) test which account for large T, and small N reject the null hypothesis of no
cross-section dependence at the 1% level.
such as Dow Jones Newswire, Wallstreet Journal, or StockTwits, among others (Blitz et al., 2019).
For example, Smales (2014) or Shi and Ho (2020) have previously used this news monitor
database to investigate the link between news sentiment and implied volatility. Furthermore, to
control for the sovereign default risk, I include country CDS spreads among covariates as
recommended by Grammatikos and Vermeulen (2012). Additionally, I consider gold price as a
benchmark for the common global factor3. A detailed data description and its source are presented
in Table 2.

Table 2. The data

Variables Description and Source

Stock market Daily returns are calculated as: , where is the value of the market index in day t
return (RET) for country i. Source: Thomson Reuters.
It measures the level of news chatter that makes reference to panic or hysteria and coronavirus.
The panic Index
Values range between 0 and 100. The higher the index value, the more references to panic found
(PI)
in the media. Source: RavenPack https://coronavirus.ravenpack.com/
The Media Hype It measures the percentage of news talking about the novel coronavirus. Values range between 0
Index (HY) and 100. Source: RavenPack https://coronavirus.ravenpack.com/
It measures the level of media chatter about the novel virus that makes reference to
The Fake News
misinformation or fake news alongside COVID-19. Values range between 0 and 100 where a value
Index
of 2.00 indicates that 2 percent of all news globally is talking about fake news and COVID-19.
(FNI)
Source: RavenPack https://coronavirus.ravenpack.com/
The Country It measures the level of sentiment across all entities mentioned in the news alongside the
Sentiment Index coronavirus. The index ranges between -100 (most negative) and 100 (most positive) sentiment
(CSI) while 0 is neutral. Source: RavenPack https://coronavirus.ravenpack.com/
The Contagion It calculates the percentage of all entities (places, companies, etc.) that are reported in the media
Index alongside COVID-19. Values range between 0 and 100. Source: RavenPack
(CTI) https://coronavirus.ravenpack.com/
The media
It calculates the percentage of all news sources covering the topic of the novel coronavirus. Values
coverage Index
range between 0 and 100. Source: RavenPack https://coronavirus.ravenpack.com/
(MCI)
Credit Default Swap (CDS) rate on 5-year bonds issued by the national government. Source:
Sovereign CDS
Thomson Reuters.
Gold Price Daily spot closing price of Gold. Source: Thomson Reuters.

3. Methodology

Considering the excessive market volatility during the COVID19 financial turmoil, I employ a
panel quantile regression framework. Unlike other econometric approaches that only focus on the

3Hood and Malik (2013) show that gold serves as a “hedge and a weak safe haven for US stock market." This
hypothesis is confirmed by Wu et al. (2019) during both extreme bearish and bullish markets.
mean effects, the quantile regression model is a more powerful tool for handling fat tails or extreme
values throughout the asset return distributions (du Plooy, 2019). Generally, at any level ( )
across the distribution of given a set of variables , the conditional quantile shows ( )
* ( ) + where ( ) is the conditional distribution function. Thereby, the panel
quantile regression is illustrated by the following specification:

( ) ( ) (1)

In Eq. (1) ̅̅̅̅̅ and ̅̅̅̅̅, denote the number of countries and days, respectively, is the
stock market return, denotes the set of covariates, ( ) is the common slope coefficient while
is individual-specific fixed effect coefficient. To account for the unobserved country heterogeneity, I
follow Koenker (2004), which treats the fixed effects as nuisance parameters. The ingenuity of this
approach comes from the introduction of a penalty term in the minimization problem leading to the
following algorithm:

∑∑∑ ( ( )) ∑ (2)
( )

In Eq. (2) is the quantiles’ index, is the quantile loss function while is the relative weight
given to the th quantile. The penalty term is diminishing the impact of individual effects on
achieving higher efficiency for the global slope coefficients.

The quantile regression represents an important class of nonlinear data models (Galvao et al.,
2020) and has become a successful tool in economics and finance due to its ability to draw
inferences about observations that rank below or above the population conditional mean. In some
cases, the quantile-varying estimates reveal that OLS methods provide an incomplete picture
regarding the link between variables, especially for extreme events. However, by estimating the
entire quantile processes one can capture the presence of some potential nonlinear relationships
between the dependent variable and the covariates which could not be brought to light by other
linear approaches. Recent findings have extended the basic method of Koenker (2004) for panel
data by accounting for the presence of nonlinear conditional quantile functions (Mizera, 2018;
Geraci, 2019). All in all, the quantile regression enjoys a number of features such as robustness to
outliers and equivalence to monotone transformations (Gilchrist, 2000) making it a useful tool
when it comes to capturing some stylized facts, especially when the assumption of linearity may not
be appropriate.
 The characteristics of the panel necessitate two additional comments. First of all, the existence
of cross-sectional dependence is likely to bias the estimated standard errors. To overcome this
problem, Gaibulloev and Sandler (2014) suggest the usage of a standard factor-augmented
regression. However, in a quantile framework, this issue is less investigated4, which leads us to use
a proxy for common global factor 5 such as gold or oil prices. Second, Bar et al. (2012) bring strong
empirical evidence indicating that current returns exhibit a positive autoregressive behavior on
lower quantiles and a negative one across higher ones. For this reason, I include one day lagged
returns among covariates. Details regarding the correlation matrix of covariates are presented in
Appendix 1.

4. Results

Tables 3 provide the estimated coefficients for a representative selection of quantiles. To assess
robustness for the results, I additionally report the estimates of a Seemingly Unrelated Regression
(SUR), which is recommended for handling cross-sectional dependence across a panel with small N
and large T (Sarafidis and Wansbeek, 2012). According to the estimation results, several
interesting facts come to light. First of all, fake news appears to exhibit a negative nonlinear U-
shaped impact during normal market conditions, i.e., from 25th to 75th, throughout the distribution
of returns. This empirical fact is illustrating the growing importance of online fake news in the
globalized financial markets and its implications for stock trading (Allcott and Gentzkow, 2016;
Zhang and Ghorbani, 2020). However, it is worth mentioning that fake news is not affecting stock
market returns at the times of extreme bearish (5th quantile and lower) and bullish markets (95th
quantile and upper) and appears to influence the stock dynamic in a positive manner during
periods of harshly decline (around the 10th quantile).

Second, the media coverage has a negative and monotonically decreasing impact from the
middle to superior quantiles. This result is in line with the previous findings reported in the
literature by Fang and Peress (2009), arguing that “the breadth of information dissemination
affects stock returns.” A slightly similar effect is noticeable for the contagion index, indicating that
the higher the numbers of entities related to COVID-19 news, the lower the expected stock market
returns, especially during recovering periods.

4 Even though Harding and Lamarche (2014) and Harding et al. (2020) propose estimators robust to
cross-sectional dependence in a quantile regression framework, they are applicable when both T and N are
large, which is not the case here.
5 Based on pairwise Dumitrescu and Hurlin's (2012) panel causality test, gold return homogeneously

causes stock market returns but not otherwise. When considering the crude oil price as a proxy for the
common global factor no significant evidence of causality comes to light.
 Table 3. Estimation results (p-values in pharenthesis)
Quantiles Panel
Variables
5th 10th 25th 50th 75th 90th 95th SUR
-0.0563 -0.0431 -0.0180 0.0006 0.0150 0.0331 0.0435 -0.0038
Intercept
(0.0000) (0.0000) (0.0000) (0.6326) (0.0000) (0.0000) (0.0000) (0.0000)
Lagged -0.0540 -0.0255 -0.1220 -0.1018 -0.2398 -0.3452 -0.4079 -0.2250
Returns (0.5366) (0.6540) (0.1566) (0.2791) (0.0165) (0.0002) (0.0002) (0.0000)
Panic -0.0004 -0.0058 -0.0010 -0.0035 -0.0030 0.0058 0.0024 -0.0012
Index (0.9694) (0.5596) (0.8207) (0.2179) (0.3893) (0.4257) (0.7802) (0.7487)
Media Hype -0.0679 -0.0401 0.0144 0.0179 0.0154 0.0108 0.0255 0.02196
Index (0.2095) (0.4601) (0.7517) (0.2051) (0.1712) (0.5383) (0.1847) (0.0774)
Fake News 0.0061 0.0040 -0.0024 -0.0051 -0.0041 -0.0021 -0.0001 -0.0035
Index (0.1334) (0.0740) (0.0956) (0.0000) (0.0003) (0.5605) (0.9865) (0.0270)
Sentiment -0.0013 -0.0007 0.0005 0.0006 0.0018 0.0024 0.0028 0.0004
Index (0.4354) (0.6186) (0.7209) (0.3883) (0.1714) (0.1583) (0.1933) (0.5431)
Contagion 0.0136 -0.0085 -0.0092 -0.0129 -0.0184 -0.0075 -0.0133 -0.0170
Index (0.4354) (0.6754) (0.4280) (0.0511) (0.0016) (0.6808) (0.3699) (0.0333)
Media -0.0847 -0.0758 -0.0769 -0.0367 -0.0367 -0.1109 -0.1412 -0.0815
Coverage (0.1068) (0.1645) (0.0833) (0.0163) (0.1173) (0.0375) (0.0221) (0.0016)
Sovereign -0.0047 0.0095 -0.0104 -0.0139 -0.0283 -0.0138 -0.0160 -0.0091
CDS (0.8993) (0.7663) (0.6980) (0.1768) (0.0017) (0.3737) (0.4532) (0.4397)
Gold 0.5554 0.4286 0.3030 0.1941 0.3008 0.5698 0.7541 0.4556
Returns (0.0000) (0.0121) (0.0096) (0.2245) (0.0443) (0.0000) (0.0000) (0.0000)
Observations 300 300 300 300 300 300 300 300

Third, the superior quantiles of returns distribution exhibit negative dependence on past
performances, while smaller and middle quantiles are not affected by this phenomenon. This
empirical fact confirms the previous findings reported in Bar et al. (2012), which suggests that the
stock market underreacts to macroeconomic news if they are in a bad state. Furthermore, the gold
return has a nonlinear positive correlation with the stock markets, which amplifies during extreme
bearish and bullish periods indicating that it does not behave as a “Safe Havens” asset. This
intersting result confirms the findings reported by Corbet et al. (2020b). All relevant estimates
retain their signs and statistical significance under SUR specification illustrating in this way their
robustness.

5. Conclusions

This study offers novel empirical evidence on the relationship between COVID19-related news
and stock market returns across the top six most affected countries by the pandemic. By employing
a panel quantile regression model, I show that the stock markets present asymmetric dependencies
with COVID-19 related information such as fake news, media coverage, or contagion. The result
suggests the need for more intensive use of proper communication channels to mitigate COVID19
related financial turmoil.
Author Statement

Cosmin-Octavian Cepoi: Conceptualization, Methodology, Data curation, Software, Writing- Original

draft preparation, Writing- Reviewing and Editing.
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Appendix 1. The correlation matrix of covariates