COVID-19-induced Returns, Attention, Sentiments and Social Isolation: Evidence from Dynamic Panel Model

Abstract

This article develops a dynamic panel model to examine the association among coronavirus outbreak, investor attention, social isolation, investor sentiments and stock returns in the German Stock exchange. The results of the two-step GMM estimator show a significant effect of coronavirus disease 2019 (COVID-19) cases on the Frankfurt Stock Exchange after controlling for calendar anomalies, meteorological conditions, country-specific factors and oil returns. Results also show that a higher level of stock returns during social isolation (lockdown period) is explained by investor attention to buy underpriced stocks. Thus, temporary social isolation enhances an investor’s ability to make better investment decisions. Investor sentiment indicators (momentum and liquidity) are also positively associated with the stock return and partially mediate the COVID-returns link, but they have no direct effect on investor attention. The stock market attracts investor attention under good news shocks (recovered cases) when investor sentiments are optimistic. Our results are robust across the transparency level of firms and their size.