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Abstract

This study examines the reaction of stock market returns to the COVID-19 pandemic (cases and deaths) and government policy interventions (GPIs) using the indices of stock markets of 11 African countries. We employ a combination of times series (OLS) and panel (pooled OLS and panel VAR) estimation methods. Evidence from the time series shows that announcement of COVID-19 confirmed cases leads to a decline in stock returns in countries like Cote D’Ivoire, Egypt, Morocco, Nigeria and Uganda by 0.005%, 0.003%, 0.012%, 0.011% and 0.014% respectively. Similarly, the announcement of GPIs also results in a decline in stock returns in countries like Cote D’Ivoire, Kenya, Morocco, Namibia and Nigeria by 0.002%, 0.035%, 0.035%, 0.022% and 0.048% respectively. The COVID-19 confirmed deaths, however, do not have a significant effect on stock returns except in Kenya (0.004%) and South Africa (0.032%) where it exhibits a positive effect. The interaction of GPIs with cases has a negative impact on stock market returns in Cote D’Ivoire, Egypt, Morocco, Nigeria, South Africa and Uganda by 0.004%, 0.003%, 0.002%, 0.006%, 0.012% and 0.014% respectively. From the pooled OLS results, it is found that a 1% increase in the COVID-19 confirmed cases leads to a reduction in stock returns by 0.003%. The announcement of government policy also results in a decline in stock returns by 0.005%. However, the interaction of GPIs with cases reduces the negative effect of the COVID-19 confirmed cases on stock returns to 0.001% from 0.003%. We also find that the interaction of GPIs with the COVID-19 confirmed death yield a positive and significant effect on stock returns (0.004%). This implies that the announcement of GPIs has a direct negative and an indirect positive effect on stock returns. The IRF results show that initially, the stock returns react negatively to cases, deaths and GPIs, however, the negative effect flattens over time. FEVD results show that most fluctuations in stock returns come from its shocks, while the little fluctuations come from cases, deaths and GPIs. The interaction of GPIs with cases and deaths further reduces the fluctuations in stock returns. The results show that GPIs such as social distancing, health containments and stimulus packages help in attenuating the impact of COVID-19 confirmed cases and deaths on stock returns.