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Q&A: How COVID lockdowns and financial policies affected the stock market

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Lorne Fultonberg


Lorne Fultonberg


303 871-2660

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Numbers and arrows on a stock market board
Tianjie Deng

The stock market doesn’t tend to do well amid fear and uncertainty. The COVID-19 pandemic brought both.

As the world scrambled to fight a remarkably infectious disease, Wall Street took a nosedive while businesses closed and laid off employees. Even a year after the virus’s initial proliferation, 44% of non-retired Americans expected it would take them three years or more to get back to where they were a year ago, a Pew Research Center survey reported. About 1-in-10 predicted they would never recover.


Tracy Xu
Young Jin Lee

In an attempt to keep its citizens safe and the economy stable, national governments stepped in, ordering lockdowns and cutting interest rates.

In research recently published in the Journal of Economics and Business, three Daniels College of Business faculty — Tianjie Deng, Tracy Xu and Young Jin Lee — wondered whether such policies made any difference, and if so, why? They examined responses in 11 countries and Hong Kong (a special administrative region) from January-July 2020. Such a broad sample allowed them to compare policies implemented on different continents, in different economic systems and in communities with varying levels of COVID exposure.

Deng, Xu and Lee explained their findings in an email interview with the DU Newsroom and explored what their results could mean for governments looking to stabilize the economy during times of crisis.

Your paper talks a lot about the role of "non-economic factors" in the financial system. How do these factors make an economic impact, and why do they need to be considered when creating financial policy?

Deng and Xu: The financial system does not exist in a vacuum — it is heavily influenced by political and social factors. Our study shows that non-pharmaceutical interventions such as lockdown orders are proven to have significant implications on the stock-market reaction around the world. Therefore, governments need to incorporate such factors into policymaking.

Why was it important to study the effects on the stock market specifically?

Xu: The COVID-19 pandemic has posed a significant threat to global economic growth. Policymakers are facing unprecedented challenges. A prominent dilemma is a choice between “a healthy nation” and “a healthy economy.” No one policy can achieve both, and [some] policies might be contradictory or conflicting. Thus it is critical to study whether the policy responses implemented are effective in combating the COVID-19 catastrophe and what roles they play in the economy. Please note that we are not suggesting that the stock market is the only or even the main policy transmission path. Our study examines the stock market as one of the important transmission mechanisms to shed light on the role of different policies on the economy and provide implications on policymaking.

How did you compare policies and their results around the world?

Deng: Basically, we wanted to look at how the stock market was changed as a result of lockdown policies. To do this, we started by looking at countries (the treatment group) that implemented a certain policy (for example, the lockdown), and comparing the stock index return difference before and after the implementation of the policy. However, the problem with this comparison is that it does not take into consideration other variables that may be responsible for this difference. To account for that, we examined countries that are similar to the countries in the treatment group but that did not experience the lockdown – we call these countries the control group. Then, we again calculated the difference of the stock-index return in these “control” countries before and after the policy was introduced in the countries in the treatment group. This second difference in the control group is likely caused by those unobservable factors we mentioned because the policies did not actually take place in these countries. By comparing these two “differences,” we remove the effects of other factors on the stock market and separated the effect introduced by the policy itself. This method is called difference-in-difference (DID) and is commonly employed to measure the economic effect of a policy change or legislative measure.

How, if at all, do you think COVID differs from more frequently occurring events that contribute to the normal ups and downs of the market?

Deng and Xu: Most other events that trigger the fluctuations of the market might be precedented by similar events in history, which may be factored into investors’ expectations. However, the COVID pandemic is unexpected … Such a black-swan event is certainly different from those more frequently occurring events. In particular, the COVID pandemic has caused a systematic impact not only on one country but around the world.

Are these lockdown and interest-rate policies any different than what a government has traditionally used during times of crisis?

Deng: Yes. Although policies have been implemented to control the regional spread of disease throughout history (like travel restrictions in Spain during the 1918 flu and regional quarantines in China during the 2003 SARS outbreak), the scale of the national lockdowns during the COVID pandemic is enormous and unprecedented.

Originally, you expected both policies to have positive effects but interest rate reductions to have a bigger impact. Why is that? What did you ultimately find?

Lee and Xu: Yes, we expected both policies to play a significant role, not only to fight COVID-19, but also to ease the panic of the economy. And our results confirmed that by showing the rebound of global stock markets when both policies were announced. In addition, we hypothesized that the magnitude of the reaction depends on the nature of the policy action. The policy transmission literature demonstrates that the stock market is a critical transmission path in channeling monetary policy, such as the interest rate cut policy. Hence we expect the global stock markets to react more vigorously to the announcement of interest rate cut policy, in comparison to a lockdown order and stay-at-home order. And the empirical findings support our hypothesis.

What implications does this research have as the pandemic continues? What implications could it have beyond the pandemic?

Lee: We believe the effect of lockdown is short-lived and less consequential, while the effect of the interest cuts could be longer-term and substantial. Because the interest cut was a manipulation of the economic status during the pandemic, it could be costly in the future as we can see now that inflation could emerge with the mixture of supply chain issues. Therefore, the policymakers need to act carefully with the manipulation of the interest rate during an unprecedented event such as this COVID-19 pandemic.