What Explains the COVID-19 Stock Market?
Josue Cox, Daniel L. Greenwald, and Sydney Ludvigson
August 28, 2020
What explains stock market behavior in the early weeks of the coronavirus pandemic? Estimates from a dynamic asset pricing model point to wild áuctuations in the pricing of stock market risk, driven by shifts in risk aversion or sentiment. We Önd further evidence that the Federal Reserve played a role in these áuctuations, via a series of announcements outlining unprecedented steps to provide several trillion dollars in loans to support the economy. As of July 31 of 2020, however, only a tiny fraction of the credit that the central bank announced it stood ready to provide in early April had been extended, reinforcing the conclusion that market movements during COVID-19 have been more reáective of sentiment than substance.