One of the most visible indicators of the economic disruption triggered by COVID-19 has been the frequency of dramatic movements in equity-market prices. In the 22 trading days between February 24 and March 24, 18 days saw the US stock market jump at least 2.5 percent up or down—a pace 23 times greater than the average frequency of such jumps since 1900.

The stock market volatility engendered by the pandemic far outstrips the stock market impact that could be attributed to any previous outbreak of infectious disease, in large part because of the policy response to the health crisis, research suggests.

A group of economists—Northwestern’s Scott R. Baker, Stanford’s Nicholas Bloom, Chicago Booth’s Steven J. Davis, University of Chicago PhD candidate Kyle Kost, Northwestern PhD candidate Marco Sammon, and University of Pennsylvania PhD candidate Tasaneeya Viratyosin—examined a number of explanations for the current pandemic’s historic effect on markets.

To quantify how much the coronavirus has contributed to the market’s erratic ups and downs, the researchers used a tool developed by Baker, Bloom, Davis, and Kost in previous research: an equity-market volatility tracker, which mines the text of newspaper articles to create an index of market volatility over time. By searching the articles in the EMV tracker for keywords associated with outbreaks of disease—such as epidemic,pandemic, virus, flu, and disease—they were able to compare the role of this health-care crisis to previous infectious-disease outbreaks. They find that the prominence of the coronavirus in coverage of equity-market volatility is totally without precedent.

The market’s wild ride

Equity-market volatility has been historically high in the wake of the coronavirus pandemic.

Blue lines indicate trading days with at least 2.5% change from previous day’s close.

In another exercise, they and research assistants reviewed next-day newspaper accounts in order to diagnose the forces behind large daily stock market jumps, as perceived contemporaneously by journalists.From January 2, 1900, to February 23, 2020, “contemporary journalistic accounts attributed not a single daily stock market jump to infectious disease outbreaks or policy responses to such outbreaks,” the researchers write. “Perhaps surprisingly, even the Spanish flu pandemic [of 1918 and 1919] fails to register in next-day journalistic explanations for large daily stock market moves.”

By contrast, next-day newspaper articles attributed 15 or 16 of the 18 stock market jumps between February 24 and March 24 to news about the coronavirus or policies related to it. Far from being a nonfactor in news about market volatility, the current pandemic has been a constant figure in market news during a historically volatile period.

Why has this outbreak wreaked so much more havoc on equity markets than those in the past? One possibility the researchers consider is that the coronavirus and the disease it causes, COVID-19, are simply more serious than the diseases at the heart of past public-health crises. But the researchers consider this answer “highly incomplete,” given that even the notoriously deadly 1918 flu didn’t trigger a market reaction remotely similar to that caused by the coronavirus.

Another explanation rests on how much more rapidly news spreads today than was possible during previous disease outbreaks. But the researchers note that the Spanish flu’s stock market impact was comparatively mild even over the course of months, during which time news of the disease would have had plenty of time to travel. The researchers also consider the interconnectedness of the modern economy, and the importance of services—which often involve face-to-face interactions—to many developed economies, and conclude that these factors contribute to the coronavirus’s market impact, but don’t explain it entirely.

Rather, the researchers point to the public-health policy response to the pandemic, which has involved travel restrictions, the temporary closure of businesses such as bars and restaurants, and other social-distancing measures. They suggest that such containment efforts are more extensive and widespread than those in place during past disease outbreaks, and when combined with the modern economy’s interconnectivity, have created an economic impact of historic magnitude.

“The health-care rationale for travel restrictions, social distancing mandates, and other containment policies is clear,” they write. “These policies also bring great economic damage. Recent stock-market behavior is an early and visible reflection of the (expected) damage.”

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