Indian Stock Markets’ Reaction to the Nationwide Lockdown due to COVID-19: Evidence from Event Study Analysis

 

Reetika Verma¹, Rachana Behera²

¹Research Scholar, Department of Financial Administration, Central University of Punjab, Bathinda, Punjab.

²M.Com Student, Department of Financial Administration, Central University of Punjab, Bathinda, Punjab.

 

ABSTRACT:

Purpose- The study aims to investigate the impact of lockdown implementation due to Covid-19 pandemic in India on the returns of 120 companies listed in Bombay Stock Exchange (BSE). Design/ methodology/ approach – Considering lockdown implementation in India as the event and using daily returns data from February 10, 2020 to August 24, 2020 of top 40 large-cap companies, top 40 mid-cap companies and top 40 small-cap companies listed in the Bombay Stock Exchange (BSE), event study methodology was applied in the study. The abnormal returns were determined on the event day and for 1 day, 25 days, 50 days, 90 days and 100 days post the event. The cumulative abnormal returns and buy-hold abnormal returns were computed using estimation window of 30days prior to the event and 30days post the event. Findings – The results reveal that performance of almost all the companies fell down and experienced negative returns after the lockdown implementation in India. No remarkable difference was observed in the risk absorption or the recovery pattern of the small-cap, mid- cap and the large-cap companies. Originality/ value – The paper is the first attempt to examine the differential reaction of the stock returns of BSE listed large-cap, mid-cap and small-cap companies to the lockdown implementation due to Covid-19 in India.

 

 

 

1. INTRODUCTION:

The outbreak of Covid-19 in China which soon spread out all over the world has had tremendous impact on the global economy. Not only for the developing economies but this pandemic has been a great threat even for the most developed economies of the world like US, China, Japan, France, UK etc.

 

Just like the historical crises, Covid-19 also created disruptions for the global economic and financial systems. Started as a medical pandemic but Covid-19 created long lasting consequences for markets, including the stock market (Hung et al., 2021)¹.

 

Nations affected by the Covid-19 pandemic have shown poor economic performances, especially in the stock market sector (Yunus et al., 2022)².

 

Despite remarkable research on the reactions of the stock markets to Covid-19 pandemic, the impact on the Indian stock market is still not fully explored. This study is focused to investigate the impact of covid-19 on Indian stock market. Total 120 companies listed in Bombay Stock Exchange (BSE) were considered and event study methodology was used. In order to obtain the differential response of companies with different market capitalisation, category wise comparative analysis was conducted. The overall findings of the study are consistent with the existing literature suggesting that the Covid-19 has had significant impact on the stock market returns. Majority of the companies in each category experienced negative returns after the lockdown implementation in India and no remarkable difference was observed in the risk absorption or the recovery pattern of the small-cap, mid- cap and the large-cap companies.

 

The results are expected to help the investors, businesses, financial market regulatory bodies and government to understand the impact of the pandemic on the behaviour of stock returns and to make effective decisions related to future impacts of the pandemic.

 

2. LITERATURE REVIEW:

In the past two years, after the emergence of Covid-19 pandemic, the global financial markets faced major disruptions due to lockdown announcements, travel restrictions, daily increase in number of confirmed cases, daily growth in death cases, stimulus packages offered by the governments etc. Various researchers have explored the impact of Covid-19 pandemic on the stock markets of different nations through different approaches.

 

With the help of GARCH models, Adenomon, and Maijamaa (2020)³ found negative effects of Covid-19 on the stock returns in Nigeria. Aldhamari, Ismail, Al-Sabri and Saleh (2022)⁴ used event study methodology and regression analysis to study the stock markets response of Malaysian firms and industries to the announcement of government movement control order. The study confirmed the significant negative impact of government announcements on the stock market returns and it was also revealed that returns of the firms got adversely affected by the Covid-19 number of confirmed cases. Using the same methodology, Singh et al. (2020)⁵ also confirmed the negative impact of covid-19 cases on the stock market returns.

 

Rahman et al. (2021)⁶ examined the impact of Covid-19 pandemic and the government stimulus packages on the stock market of Australia. The study found that the market reacted negatively to the pandemic announcement and positively to the jobkeeper package offered by the government. On the other hand, Chun, Gen and Mingbo (2021)⁷ reported that stock market returns experienced positive influence due to overall responses taken by government.

 

Al-Qudah and Houcine (2021)⁸ examined the impact of daily increase in Covid-19 cases on the daily returns of leading stock markets. The study found the daily stock returns to be adversely affected by daily increase in cases due to Covid-19. Liu, M., Choo and Lee (2020)⁹ also investigated the impact of global pandemic announcement on major indices of 77 nations. The study found that the international stock market experienced a negative impact due to the pandemic announcement and nations with different income levels responded differently to the pandemic.

Studies like Hung, Dao, Nguyen and Vu (2021)¹⁰, Nguyen, Hai and Nguyen (2021)¹¹ also confirmed significant negative effects of daily COVID-19 confirmed cases on the stock market returns.

 

In contrast to these findings, Zoungrana et al. (2021)¹² revealed that disruptions in the stock markets were mainly caused by the death cases and not the confirmed cases. Bahrini and Filfilan (2020)¹³ also confirmed that Covid-19 death cases had negative impact on the stock markets and not the Covid -19 cases.

 

Stock market of India is one of the emerging market that has gained worldwide popularity over the past years. Huge number of studies like Ayan and Anuradha (2018)¹⁴, Deepa and Verma (2018)¹⁵, Goutam Tanty (2019)¹⁶, Goutam and Patjoshi (2016)¹⁷, Manu et al. (2017)¹⁸, Mulukalapally Susruth (2017)¹⁹, Nikhil Kaushik (2018)²⁰, Savita (2019) et al.²¹, Saji and Harikumar (2013)²², Harshitha et al. (2019)²³  have studied the Indian stock market in different contexts, this study contributes to the existing literature by examining the impact created by Civid-19 pandemic on the Indian stock market.

 

3. RESEARCH METHODOLOGY:

To analyse the reaction of Indian stock market to the Covid-19 pandemic, event study methodology is utilized in this study. Event study methodology is a widely used approach to determine the impact created by a single or multiple unanticipated events. This method is considered as a powerful approach to determine the financial impact created by an event on the markets. This statistical technique is majorly used to empirically investigate the relationship between stock returns and economic events and as observed from the existing literature, the methodology has gained researcher’s attention especially after the global economy is being hit by Covid-19 pandemic.

 

3.1 EVENT SELECTION:

During the first wave of Covid-19, full or partial lockdowns were implemented in most nations of the world in the month of March, 2020. In India, the nationwide lockdown was announced on March 24, 2020 and it was implemented on March 25, 2020. In this study, the lockdown implementation date is considered as the main event to observe the reactions of the Indian stock market to the lockdown implementation.

 

3.2 SAMPLE SELECTION:

To investigate whether lockdown implementation in India has had significant impact on the Indian stock market, total 120 companies listed in Bombay Stock Exchange (BSE) were considered. On the basis of the market capitalisation, top 40 companies in each category of large cap, mid cap and small cap were selected. These companies were related to different sectors of the economy as shown in figure 1.

 

 

Figure 1. Sector wise classification of companies in each category

 

3.3 RETURNS CALCULATION AND MEASUREMENT MODEL:

The abnormal returns (AR), cumulative abnormal returns (CAR) and buy-hold abnormal returns (BHAR) based on Capital Assets Pricing Model (CAPM) were estimated for the selected large cap, mid cap and small cap companies.

 

For all the selected companies in each of the category, the abnormal returns (AR) are calculated for the event day and for different event windows of (0,+1), (0, +25), (0, +50), (0, +90), (0, +100). The cumulative abnormal returns (CAR) and buy-hold abnormal returns (BHAR) are estimated for (−30, +30). Thus the entire study period for which the stock returns data is used ranges from February 10, 2020 to August 24, 2020 excluding the non-trading days from the event window.

 

The AR for different event window is calculated by estimating the variance between the actual returns and market expectations based returns. For the purpose of estimating the expected returns CAPM (Capital Assets Pricing Model) is used as it is one of the most popular and widely used model.

 

The CAR for different event window is computed by adding the abnormal returns on the event day, prior to the event days and post event days as per the number of days in each selected window.

 

The BHAR for different event window is computed by estimating the difference between normal buy-hold abnormal return and realized buy-hold abnormal return based on product function to know the expected holding period return over a particular window.

3.4 STEPS FOLLOWED FOR EVENT ANALYSIS:

Firstly, the daily returns from the closing share price for all companies were calculated and along with the daily returns for the BSE SENSEX which is the benchmark index of the Bombay Stock Exchange. The following formula was used:

                                 R_t = CP_t-CP_t-1/CP_t-1

Where, R_t = daily stock returns on day t, CP_t = closing stock price on day t, CP_t-1 = closing stock price on day t-1.

 

After estimating the daily returns, the expected returns were calculated based on CAPM (Capital Assets Pricing Model). With the help of simple regression equation and using the daily shares returns and market index returns following formula was used to calculate the expected returns:

                                 (𝑅)_𝑡 = 𝛼 + 𝛽R_SENSEX

Where, (𝑅)_𝑡 =expected stock return on day t, α = intercept of the regression equation, β = stock’s Beta value (slope), R_SENSEX = BSE SENSEX return on day t

After that, abnormal returns were computed as follows:

                                  AR_t   = R_t − (𝑅)

Where, AR_t   = the abnormal return on day t, R_t   = actual stock return on day t, (𝑅) = expected stock return on day t.

 

In most of the recent studies, the calculated abnormal returns are accumulated to know the impact created by the event on the stock prices. Thus, cumulative abnormal return (CAR) of the stocks were calculated as follows:

                                 𝐶𝐴𝑅_{𝑡1, t2} = ∑ 𝐴𝑅 _t1,t2    

 Where, 𝐶𝐴𝑅_{𝑡1, t2} = cumulative abnormal returns for the event window (t1,t2), ∑ 𝐴𝑅 _t1,t2  = sum of abnormal returns from t1 days prior to the event to t2 days post the event _. 

 

Lastly, buy-hold abnormal returns (BHAR) for each company was calculated as follows:

 

                       BHAR _t1,t2   = PRODUCT (1+ 𝐴𝑅 _t1,t2 )-1

Where, BHAR _t1,t2    = buy-hold abnormal returns for the event window (t1,t2), 𝐴𝑅 _t1,t2   = sum of abnormal returns from t1 days prior to the event to t2 days post the event.  

To test the statistical significance of CAR and BHAR, the ordinary approach of t- statistics and p value was applied.

 

4. FINDINGS AND DISCUSSION:

4.1 Empirical results of the event study on AR:

Figure 1 displays the abnormal returns 50 days after the event day for the selected large, mid and small cap companies. It shows that lockdown announcement in India created more disruptions for mid and large cap companies than small cap companies. Although negative abnormal returns are found for almost all the companies but more negative abnormal returns are found in case of  mid cap companies (40/40) followed by large cap companies (39/40) and small cap companies (36/40).

Figure 2.  The abnormal returns 50 days after the event day for Large vs. Mid vs. Small Cap Companies

 

Figure 3.  The abnormal returns 90 days after the event day for Large vs. Mid vs. Small Cap Companies

 

Figure 4.  The abnormal returns 100 days after the event day for Large vs. Mid vs. Small Cap Companies]

 

Similarly, Figure 3 shows the abnormal returns 90 days after the event day for the selected large, mid and small cap companies. Post 90 days of the event comparatively less negative abnormal returns were found. Contrast results were obtained this time, abnormal returns for only 3/40 mid cap companies and 3/ 40 large cap companies were negative. In case of small cap companies, negative abnormal returns were obtained for 12/40 companies.

 

Figure 4 depicts the abnormal returns 100 days after the event day for the selected large, mid and small cap companies. Again different trend in the abnormal returns was seen after 100 days of the lockdown implementation. Abnormal returns were negative for all the mid cap companies, for 37/40 of the large cap companies and for 36/40 of the small cap companies.

 

In summary, it appears that lockdown implementation in India due to Covid-19 global pandemic created huge disruptions for the Indian stock market as the returns of 90% of small cap companies, 100% of mid cap companies and 93% of large cap companies experienced significant negative impacts even after 100 days of the lockdown implementation. A flip-flopped pattern has been observed in the behavior of the returns like more severe impact after 50 days of the event less significant impact after 90 days and again serious impact after 100 days of the event on the selected companies.

 

4.2 Empirical results of the event study on CAR and BHAR:

Table 1 reports cumulative abnormal returns (CAR) and buy-hold abnormal returns (BHAR) across all the selected Small-cap companies based on the Capital Asset Pricing Model (CAPM). These returns are estimated using estimation window of 30days before the event and 30days post the event (-30,+30). To test the significance of the results, the t-statistics and p-values significant at the 5% level are also reported in the subsequent columns. Similarly Table 2 shows CAR and BHAR for the Mid-cap companies and Table 3 shows CAR and BHAR for the Large-cap companies along with its t-statistics and p-values significant at the 5% level.

 

Table1. CAR and BHAR in the event window (-30,+30) for Small-Cap Companies

Source: The authors.

Notes: CAR = Cumulative abnormal returns, BHAR= Buy and Hold abnormal returns

 

 

Table2. CAR and BHAR in the event window (-30,+30) for Mid-Cap Companies

Source: The authors.

Notes: CAR = Cumulative abnormal returns, BHAR= Buy and Hold abnormal returns

 

Table3. CAR and BHAR in the event window (-30,+30) for Large-Cap Companies

Source: The authors.

Notes: CAR = Cumulative abnormal returns, BHAR= Buy and Hold abnormal returns

 

The empirical results indicate that the impact created by the lockdown implementation in the economy has been severe for most of the small, mid and large-cap companies. On the basis of the CAR results reported in Table 1, it is observed that the event had significant impact on 35/40 small-cap companies and BHAR results also reported to be significantly impactful for 37/40 small-cap companies. Similarly, as displayed in Table 2, significant CAR results were found for 32/40 mid-cap companies and 35/40 mid-cap had significant impact on the BHAR. As presented in Table 3, large-cap companies also experienced significant shock due to the event of lockdown implementation. Significant CARs were obtained for 29/40 large-cap companies and significant BHAR results were obtained for 32/40 selected large-cap companies. 

 

Overall, the cumulative effect of the event was found to have insignificant impact only on 13% of selected small-cap companies, 20% of the selected mid-cap companies and 27% of the large-cap companies. The cumulative negative impact was in the range of -24.12% (t-statistics= -3.48) to -1.81% (t-statistics = -0.27) for the small-cap companies, -26.86% (t-statistics= -3.69) to -0.99% (t-statistics= -0.18) for mid-cap companies and -31.72% (t-statistics= -6.31) to -4.05% (t-statistics= -0.66) in case of large-cap companies.

 

It appears that the lockdown implementation in India created severe impact on almost all of the large-cap, mid-cap and small-cap companies and even the top companies were not able to manage the unprecedented risk very well.  The degree of impact on the abnormal returns varied in different windows which implies that the level of influence created by the lockdown implementation significantly differ across different categories during different event windows.

Abnormal returns on the event day were significantly positive for all the companies except 1 small cap company. Similarly the abnormal returns were significantly negative only for two small cap companies one day post the event. It seems that not much impact was created on the returns on the lockdown implementation day and 1 day after the lockdown implementation. Slightly different results were obtained post 25 days of the event, significant negative abnormal returns were obtained for not only 3 small-cap but also for 1 mid-cap and 2 large-cap companies.

 

The scenario changed after 50 days of the event, as in this window abnormal returns were significantly negative for all the companies except 1 large-cap company, 1 mid-cap company and 1 small-cap company. The significant negative impact continued for the subsequent window periods as well. 90 days after the event, the abnormal returns were significantly positive for only 5 small-cap, 9mid-cap and 8 large-cap companies. Similarly, post 100 days of the lockdown implementation, positive abnormal returns were found only for 2 large-cap and 1 small-cap company.

 

Overall, significant negative abnormal returns were found for majority of the companies in each category. On the event day and in the subsequent days after the lockdown implementation, varied degree of influence was observed for all the companies in each category. Comparatively higher significant impact was found in case of small-cap companies than mid-cap companies and large-cap companies. It is observed that lockdown implementation due to Covid-19 in created enormous impacts on stock returns of Indian companies with a varied level of influence in different window periods and among different categories of companies.

 

5. CONCLUSIONS:

The Covid-19 pandemic created disruptions for the financial markets all across the globe. Applying the event study methodology, this study sets out to explore the reaction of Indian stock market to the lockdown implementation throughout the nation due to Covid-19 pandemic. On the basis of the market capitalisation, top 40 companies in each category of large cap, mid cap and small cap listed in Bombay Stock Exchange (BSE) were considered. The abnormal returns, cumulative abnormal returns and buy-hold abnormal returns across different event windows were examined. Consistent with Maretno et al. (2021)²⁴ and Yan (2020)²⁵ this study observed that small-cap companies experienced more negative shocks as compared to large-cap companies. The study found dynamic impact across different windows in the behavior of the abnormal returns like more severe impact in the early stages and 50 days post the event then less significant impact after 90 days and again serious impact after 100 days of the event was observed. In addition, the insignificant impact on the cumulative abnormal returns in the event window (-30, +30)  was found only for 13% of selected small-cap companies, 20% of the selected mid-cap companies and 27% of the large-cap companies. The buy and hold abnormal returns in the event window (-30,+30) for all the selected small-cap, mid-cap and large-cap companies were significant negative except for only three large cap companies. Overall, the findings reveal that the performance of the Indian stock market experienced significant strong impact due to the Covid-19 pandemic.

 

6. REFERENCES:

1.      Hung, Dao Van, Nguyen Thi Minh Hue, and Vu Thuy Duong. The Impact of COVID-19 on Stock Market Returns in Vietnam. Journal of Risk and Financial Management. 2021; 14: 441.

2.      Yunus Kasim, M., Muslimin, and Dwijaya, I. K. B. Market reaction to the Covid-19 pandemic: Events study at stocks listed on LQ45 index. Cogent Business and Management. 2022; 9(1), 2024979.

3.      Adenomon, M. O., and Maijamaa, B. On the Effects of COVID-19 outbreak on the Nigerian Stock Exchange performance: Evidence from GARCH Models. 2020; https://doi.org/10.20944/preprints202004.0444.v1

4.      Aldhamari, R., Ismail, K. N. I. K., Al-Sabri, H. M. H., and Saleh, M. S. A. H. Stock market reactions of Malaysian firms and industries towards events surrounding COVID-19 announcements and number of confirmed cases. Pacific Accounting Review, (ahead-of-print). 2022; DOI: https://doi.org/10.1108/PAR-08-2020-0125.

5.      Singh, B., Dhall, R., Narang, S., and Rawat, S. The outbreak of COVID-19 and stock market responses: An event study and panel data analysis for G-20 countries. Global Business Review. 2020; 0972150920957274.

6.      Rahman, M. L., Amin, A., and Al Mamun, M. A. The COVID-19 outbreak and stock market reactions: Evidence from Australia. Finance Research Letters. 2021; 38, 101832.

7.      Chun-Ping Chang, Gen-Fu Feng and Mingbo Zheng. Government Fighting Pandemic, Stock Market Return, and COVID-19 Virus Outbreak. Emerging Markets Finance and Trade. 2021; DOI: 10.1080/1540496X.2021.1873129.

8.      Al-Qudah, A. A., and Houcine, A. Stock markets' reaction to COVID-19: evidence from the six WHO regions. Journal of Economic Studies. 2021; 49(2), 274-289.

9.      Liu, M., Choo, W. C., and Lee, C. C. The response of the stock market to the announcement of global pandemic. Emerging Markets Finance and Trade. 2020; 56(15), 3562-3577.

10.   Hung, Dao Van, Nguyen Thi Minh Hue, and Vu Thuy Duong. The Impact of COVID-19 on Stock Market Returns in Vietnam. Journal of Risk and Financial Management. 2021; 14: 441.

11.   Nguyen, C. T., Hai, P. T., and Nguyen, H. K. Stock market returns and liquidity during the COVID-19 outbreak: evidence from the financial services sector in Vietnam. Asian Journal of Economics and Banking. 2021; DOI: 10.1108/AJEB-06-2021-0070.

12.   Zoungrana, T. D., Toe, D. L. T., and Toé, M. Covid‐19 outbreak and stocks return on the West African Economic and Monetary Union's stock market: An empirical analysis of the relationship through the event study approach. International Journal of Finance and Economics. 2021; DOI: 10.1002/ijfe.2484.

13.   Bahrini, R., and Filfilan, A. Impact of the novel coronavirus on stock market returns: evidence from GCC countries. Quantitative Finance and Economics. 2020; 4(4), 640-652.

14.   Ayan Majumdar, Anuradha Saha. Influence of Macroeconomic Variables on Stock Market Volatility: A study on Nifty.Asian Journal of Management. 2018; 9(1):440-444.

15.   Deepa Mangala, Anju Verma. Financial Risk Tolerance of Individual Equity Investors in Indian Stock Market.Asian Journal of Management. 2018; 9(2):990-998.

16.   Goutam Tanty. Assessing the Bombay Stock Exchange Index Volatility through Garch Model. Asian Journal of Management. 2019; 10(3): 236-240.

17.   GoutamTanty, P K Patjoshi. A Study on Stock Market Volatility Pattern of BSE and NSE in India. Asian J. Management. 2016; 7(3): 193-200.

18.   Manu K S, Varsha L Menda. Dynamics of Indian Stock Market Integration with Global stock Markets. Asian J. Management. 2017; 8(3):559-568.

19.   Mulukalapally Susruth. Application of GARCH Models to Forecast Financial Volatility of Daily Returns: An Empirical study on the Indian Stock Market. Asian J. Management. 2017; 8(2): 192-200.

20.   Nikhil Kaushik. Corporate Governance and Indian Stock Market: A Study with Asymmetric Conditional Volatility Models. Asian Journal of Management. 2018; 9(1):80-86.

21.   Savita, Suresh Kumar Dhameja. Measurement of time varying Volatility and its relation with noise Trading: A Study on Indian Stock Market using Garch Model. Res. J. Humanities and Social Sciences. 2019; 10(2):479-483.

22.   T.G. Saji, S. Harikumar. Long run Behavior of Equity Returns: An Exploration of Indian Experience. Asian J. Management. 2013; 4(1): 22-27.

23.   V. Harshitha Moulya, Abuzar Mohammadi, T. Mallikarjunappa. Optimal Vs 1/N Diversification and Portfolio Evaluation: A study on Indian Stock Market. Asian Journal of Management. 2019; 10(3): 248-254.

24.   Maretno Agus Harjoto, Fabrizio Rossi and John K. Paglia. COVID-19: stock market reactions to the shock and the stimulus. Applied Economics Letters. 2021; 28:10, 795-801.

25.   Yan, C. COVID-19 Outbreak and stock prices: Evidence from China. 2020; Available at SSRN 3574374.

 

 

 

Accepted on 16.11.2023      ©AandV Publications All right reserved