An Exploratory Study on the Impact of the COVID-19 Confinement on the Financial Behavior of Individual Investors.

AuthorPriem, Randy
  1. Introduction

    In December 2019, China alerted the World Health Organization (WHO) of having around 40 cases of pneumonia in Wuhan where the infected worked at the city's Huanan Seafood Wholesale Market. Chinese officials could rule out the possibility that there was a recurrence of the severe accurate respiratory syndrome (SARS) and declared the virus as being novel. On 11 March 2020, the WHO officially declared the COVID-19 virus outbreak to be a pandemic. At the beginning of October 2020, COVID-19 resulted in more than 36 million confirmed cases including more than a million deaths. The virus has kept millions of people in their homes, given that the large majority of countries installed travel restrictions, lockdowns, and physical distancing measures to hold back the virus.

    In addition to the negative impact on people's health and psychological well-being, the virus has negatively affected the global economy, leading to an increase in unemployment and business failures (Zhang et al., 2020). Certain sectors, like tourism and culture, have been facing very difficult times. Already from the onset of the virus, Japan's economy minister warned that corporate profits and factory production would be globally hit due to the COVID-19 outbreak.1 On 20 March 2020, Goldman Sachs warned that the US GDP would decrease by almost 30% by the end of the 2nd quarter of 2020 and that the virus would lead to an increase in unemployment by 9%.2 Scott Morrison, the prime minister of Australia, compared the COVID-19 crisis as equivalent to the Great Depression of the 1930s.3

    Besides harming the real economy, COVID-19 has dramatically affected financial markets all over the world. From 24 to 28 February 2020, The Down Jones Industrial Average, the Nasdaq Composite, and the S&P 500 index reported their largest one-week declines since the 2008 financial crisis. The FTSE, the UK's main index, dropped more than 10% on 12 March 2020, being its worst day since 1987.4 Japan's stock market decreased by more than 20% from its highest position in December 2019.5 Also in Continental Europe, equity indices fell sharply: the German Dax, the French CAC 40, and the Spanish IBEX 35 all crashed substantially. Also in Belgium, the BEL 20, being the leading equity index, faced the largest decrease in its existence (i.e., -14.21%). As central banks started taking actions6 and pharmaceutical companies started working on COVID-19 vaccines, stock prices started to rise again but did not fully recover yet. Stock markets have been deviating thus somewhat from the negative real economic situation, especially for SMEs.

    In Belgium, the media issued press releases stating that individual investors were exceptionally active in financial markets. Based on an initial survey conducted by a Belgian newspaper (De Tijd), the reason is that individual investors wanted to benefit from the exceptional low stock prices and thus considered the stock market crash as an opportunity to invest. From the end of February 2020 till April 2020, many individuals also had the time to invest, as they were temporarily unemployed or were forced to work from home.7 Many Belgian online brokers, like BinckBank, Bolero, and Keytrade witnessed a large increase in their number of clients, and the Dutch broker DeGiro, often used by Belgian individuals, even needed to introduce a waiting list.8 The low-interest-rate environment might have acted as a catalyst for individuals to see the temporary floor in equity prices as the right time to start investing.

    On 6 May 2020, the European Securities and Markets Authority (ESMA) issued a public statement to draw investment firms' and their clients' attention to the fact that they need to continue to adhere to the obligations of the Markets in Financial Instruments Directive (MiFID II).9 During these times of intensified market volatility, investment firms have even greater duties to provide investment or ancillary services to investors. ESMA reminded investment firms of the suitability and appropriateness requirements when providing investment advice or portfolio management. ESMA stressed that the appropriateness assessment is particularly important for new clients wishing to invest in complex financial instruments when markets are more volatile.

    This article investigates the impact of the Belgian COVID-19 confinement on the financial behavior of individual investors. Specifically, the article is the first to examine whether individual investors, being forced to remain in their houses, acquired relatively more shares during the period 24 February 2020 till 30 April 2020, the COVID-19 period that negatively affected the Belgian financial market the most. The article further investigates whether individuals show different financial behavior based on their age, their activity level, and their gender, given that these investor characteristics are important drivers of investor behavior (see Barber and Odean, 2001; Dhar and Zhu, 2006; Seru et al., 2010).

    Although the literature on individual investor behavior is extensive (see infra), little is known about the impact of a financial crisis caused by a health issue on individual investors' behavior and perceptions. Indeed, previous literature has not focused on the exceptional situation in which financial markets crash due to a virus for which no immediate future solution (e.g., a vaccine) was available. Also, the situation is exceptional in that investors were forced to remain in their houses or within a "bubble" of only a few close family members and friends being confronted with increased mortality news but with more time to invest and follow equity markets.

    Glaser and Weber (2005; 2007) examined investors' expectations and behavior during the September 11 crisis. These scholars documented the influence on returns and volatility forecasts of individual investors. Based on survey analysis, they found that return forecasts of investors with accounts at a German online broker were indeed significantly higher after e.g. September 11. Yet, as the COVID-19 crisis is different from the one caused by the

    September 11 event, it is unclear whether their previous findings could be generalized to the COVID-19 situation. In contrast to previous crises, individuals were indeed locked down in their houses for weeks and did not only need to be concerned about the economy and their jobs, but also about their health and well-being. This might have altered their perception and level of risk averseness. The setting in this article is thus unique to examine whether individuals behave differently compared to what they usually do during normal market circumstances or did during previous bear markets.

    The impact of such a crisis on investor behavior is ex-ante difficult to hypothesize. On the one hand, as documented by Agnew and Szykman (2005) and Lam et al. (2011), a usually high volume of unexpected and dramatic news could result in information overload. Specifically regarding COVID-19, Ahundjanov et al. (2020) document that individuals have been exposed to increased uncertainty about the potential health and economic ramifications of the virus, which triggered a surge in demand for information about the virus and its financial market implications. These scholars, as well as Smales (2021) and Subramaniam and Chakraborty (2021), document that a positive correlation exists between Google Search queries related to COVID-19 and the performance of stock prices and major financial indices. As individual investors - being less sophisticated as institutional ones - have more difficulty in interpreting the frequent and sometimes conflicting information that arrives during a crisis, they could reduce their trading activity; the so-called "status-quo bias."

    On the other hand, Glaser and Weber (2007) argue that a crisis may induce frequent changes in individuals' perceptions leading to higher trading activity. These scholars indeed observed an increase in the standard deviation of individual investors' returns and volatility forecasts directly after the September 11 stock market turmoil. Taking into account that trades from individual investors have been driving stock prices in the directions of their trades and can thus have some predictive ability for future stock returns (see Barber et al., 2009), investigating individuals' behavior in these exceptional circumstances is thus of considerable importance.

    This article uses a unique proprietary dataset from the Belgian Financial Services and Markets Authority (FSMA) containing 6,379,846 transactions of 442,144 individuals conducted between 3 January 2018 and 30 August 2020. The total amount of these transactions equals almost 23 billion EUR. Article 26 of Regulation 600/2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 ("MiFIR"),10 requires investment firms that execute transactions, to report complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working date. The FSMA thus receives a) all transactions effectuated by a Belgian credit institution or investment company, b) all transactions concerning transactions on a Belgian market, and c) all transactions in a financial instrument for which the FSMA is the competent authority. From those, the transactions from the individual investors were distilled.

    The MiFIR database has several advantages compared to those used by other scholars. First, the database can be considered as the total population of transactions by individuals in Belgian listed stocks and hence does not suffer from a self-selection bias. Indeed, related articles use buy and sell transactions provided by brokerage firms and/or asset managers (e.g. Odean, 1999; Barber and Odean, 2000; Kumar and Lee, 2006; Hirshleifer et al., 2008; Hoffmann et al., 2013; Gherzi et al., 2014; Luo et al., 2020; Ortmann et al., 2020; Pagano et al., 2020) and...

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