Pandemic‐induced economic policy uncertainty and US stock exchanges

• Published date: 01 December 2022
• Author: Serdar Ongan,Ismet Gocer,Ayse Ongan
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2799

RESEARCH ARTICLE

Pandemic-induced economic policy uncertainty and

US stock exchanges

Serdar Ongan

1

| Ismet Gocer

2

| Ayse Ongan

3

1

Department of Economics, University of

South Florida, Tampa, Florida, USA

2

Department of Econometrics, Adnan

Menderes University, Aydın, Turkey

3

Duke University, Fuqua School of Business,

Durham, North Carolina, USA

Correspondence

Serdar Ongan, Department of Economics,

University of South Florida, Tampa, FL, USA.

Email: serdarongan@usf.edu

This study investigates the impacts of pandemic-induced economic policy uncertainties

(PIEPU) on the S&P500, Nasdaq-100, and Dow Jones indexes (stock returns). To this

aim, for the first time, newly created IDEMV (the Infectious Disease Equity Market Vola-

tility index (henceforth, PIEPU index) is used. The Autoregressive Distributed Lag (ARDL)

model and the Toda and Yamamoto (Journal of Econometrics, 1995, 66, pp. 225–250)

causality test are applied for the 2009–2020 period. Empirical findings indicate that rises

in the PIEPU index lead to falls of only the S&P500 and Dow Jones indexes. Corpora-

tions in the tech-heavy Nasdaq100 index do not negatively respond to rises in the PIEPU

index. Additionally, the negative impacts of the rises in the specifically COVID-19 based-

constructed PIEPU (DCOVPIEPU) index on the S&P500 and Dow Jones indexes are

higher than the negative impacts of the general PIEPU index. This can be interpreted to

mean that the larger the magnitude and spread rate of a pandemic, the larger the nega-

tive impacts on stock returns. In the sample period of this study, COVID-19 is the largest

and most destructive pandemic compared to H1N1 and Ebola.

KEYWORDS

COVID-19, Infectious Disease IDEMV Index, stock exchanges

1|INTRODUCTION

COVID-19 pandemic as a multidimensional phenomenon attracted

many scholars to examine its impacts in different areas such as public

health (Heymann & Shindo, 2020; Polychronis & Roupa, 2020), educa-

tion (Dennis, 2020: Torda, 2020), economy (Alhassan et al., 2020;

Siddiquei & Khan, 2020; Singh & Neog, 2020), environment (Alola &

Bekun, 2020; Balsalobre-Lorente et al., 2020), trade (Escaith &

Khorana, 2021; Vidya & Prabheesh, 2020). On the other hand, the

COVID-19 pandemic (known as the “great lockdown”in the IMF

report (2020)

1

to echo the Great Depression) has heightened unprec-

edented uncertainties in the economy and led to massive losses for

businesses. According to Baker, Bloom, Davis, and Terry (2020), the

magnitude of uncertainty caused by this pandemic is larger than the

2008 financial crisis and close to that of the Great Depression. Hence,

rising economic uncertainties may have negative impacts on stock

exchanges. Therefore, this study aims to investigate the potential

impacts of the pandemic-induced economic policy uncertainties

(PIEPU) on US stock exchanges through the S&P500, Nasdaq-100,

and Dow Jones indexes. To this aim, the newly created Infectious Dis-

ease Equity Market Volatility (IDEMV

2

) index by Baker, Bloom, Davis,

Kost, et al. (2020) is used. To the best of our knowledge, this is the

first attempt using this index in an empirical study related to stock

exchanges.

2|CONSTRUCTION OF IDEMV INDEX

The IDEMV was constructed as a news-based index. In the construc-

tion of this index, first, articles across approximately 3000 US newspa-

pers are scanned and terms that mention at least one term in each of

ID, E, M, and V are counted in the following four sets:

1

For full report, refer to: https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-

economic-downturn-since-the-great-depression/

2

For technical details of this index, refer to: https://www.policyuncertainty.com/infectious_

EMV.html.

Received: 1 October 2020 Revised: 4 August 2021 Accepted: 19 November 2021

DOI: 10.1002/pa.2799

J Public Affairs. 2022;22(Suppl. 1):e2799. wileyonlinelibrary.com/journal/pa © 2022 John Wiley & Sons Ltd. 1of10

https://doi.org/10.1002/pa.2799