Explaining the Covid-19 Market Collapse and Resurgence

Abstract

The goal of this paper is to explain the market’s V-shaped trajectory, with the goal of pinpointing the precise cause of the wild market movements, with specific focus on the cause of the initial market collapse and its recovery. In other words, to what extent did the aforementioned factors play a role in determining the market’s fluctuations? This paper will focus on determining the market reaction to changes in information regarding the pandemic, monetary-fiscal policy (i.e., reduced interest rates), federal relief programs, economic fundamentals and corporate earnings. As demonstrated by Cox, Greenwald and Ludvigson (2020), comparing the timing of market fluctuations to the timing of these factors is crucial to determine the underlying causes of the market’s V-shaped trajectory. Inability to explain the market’s trajectory might indicate that it is best explained by changes in investor sentiment or risk aversion. Another potential explanation would look at the idea of changes in the perceived probability of a “disaster,” as in Barro and Ursua (2012). Additionally, specific focus on how different sectors were affected by the pandemic, monetary-fiscal policy and other factors will help shed light on this question.