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Title: Structural breaks in interactive effects panels and the stock market reaction to COVID-19 Authors:  Yiannis Karavias - University of Birmingham (United Kingdom) [presenting]
Paresh Kumar Narayan - Monash University (Australia)
Joakim Westerlund - Lund University (Sweden)
Abstract: Dealing with structural breaks is an essential step in most empirical economic research. This is particularly true in panel data comprised of many cross-sectional units, which are all affected by major events. The COVID-19 pandemic has affected the global economy; however, its impact on stock markets is still unclear. Most markets seem to have recovered while the pandemic is ongoing, suggesting that the relationship between stock returns and COVID-19 has been subject to structural break. We develop a new break detection toolbox that is applicable to different sized panels, easy to implement and robust to general forms of unobserved heterogeneity. The toolbox, which is the first of its kind, includes a structural change test, a break date estimator, and a break date confidence interval. Application to a panel covering 61 countries from January 3 to September 25, 2020, leads to the detection of a structural break that is dated to the first week of April. The effect of COVID-19 is negative before the break and zero thereafter, implying that while markets did react, the reaction was short-lived. A possible explanation is the quantitative easing programs announced by central banks worldwide in the second half of March.