The impact of government response to COVID-19 on stock return predictability

Abstract

Recession is known to cause an increase in stock return predictability. The COVID-19 pandemics had not only resulted in sickness and loss of life but also plunged global economy into recession prompting governments to come up with measures to combat the disease. This paper first confirms that return predictability increased due the spread of COVID-19 using data from 41 countries on variations of popular predictors. Furthermore, it shows that government responses to COVID-19 alleviated the pandemic, the recession and reduced the return predictability with varying impact for different government measures. However, cases and deaths from COVID-19 which should have intensified the recession were found to have an insignificant impact on the return predictability.