Evolution of COVID-19 Impact on Russian Stock Market: Panic Effect

Over the past few years, many research papers have referred to stock market volatility in relation to investor attention and sentiment and our article adds to the current literature on financial market reactions to the economic consequences of COVID-19. An event such as an outbreak of an infectious disease causes a negative change in investor sentiment, which strongly influences their investment decisions and, consequently, stock market prices. The subject of the study is the mutual influence of stock market characteristics and market sentiment, during a COVID-19 pandemic crisis. The purpose of the study is to provide empirical support for the hypothesis of indirect impact of uncertainty and panic under the COVID-19 pandemic on the dynamics of the stock market in Russia. The World Health Organization and experts forecast that the world will face more than one crisis related to the spread of infectious diseases in the future, so understanding the mechanisms of mutual influence of sentiment and financial markets remains relevant. In this study, we take a novel approach to deriving an indicator for panic that has not been used before. We perform econometric modeling using a Vector Autoregressive Model (VAR) and a Vector Error Correction Model (VECM), which allows us to describe in the model not only the long-term equilibrium but also the dynamics towards it. As a result, we got consistent and efficient estimates of the long-term and short-term effects of panic and mortality rates on the volatility of the RTS stock index and found that the market reaction to COVID-19 changed as the pandemic spread: the effects of uncertainty and panic, while having a significant impact at the beginning of the crisis, faded away. The conclusions obtained in the analysis of the Russian stock market dynamics coincide with those obtained by other authors in their analysis of markets in other countries over a similar period.