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The Impact of the COVID -19 on the Stock Markets: Italy Case Study

Student’s name
Institution affiliation
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Abstract

This paper analyses the short-term effect on Italy's financial market indices of the corona virus

epidemic. The effects of infectious disease are severe and have directly impacted global stock

markets. Our findings, using an event analysis process, suggest that Italy's stock market dropped

rapidly after the virus outbreak. Relative to other countries Italy reported more negative

abnormal returns. Additional panel fixed effect regressions also affirm the adverse impact of

reported COVID-19 cases on stock indices and unusual returns via an efficient channel by

introducing negative sentiment among investors about potential returns and fears of uncertainty.

Key words: COVID-19; investor sentiment; abnormal returns; stock market indices

Introduction

On 31 Dec 2019, the World Health Organization (WHO) confirmed the first case of

COVID-19 in Wuhan China. Early in mid-January 2020 the virus started to disperse to other

Chinese regions, assisted by a large influx of citizens to their hometowns to observe the Chinese

New Year, which turned the epidemic into a global disaster. While administrators from Wuhan

on January 23 declared a full travel ban as regards to their citizens, the virus nevertheless spread

rapidly. The WHO proclaimed a global crisis on 30 January 2020 because of the accelerated

spread of COVID-19.

To date, the nations with the highest number of reported cases in the world include the

republic of china, Italy, s. Korea, France, Spain, Britain, Japan and the United States of

American. The disease focus has slowly moved from China to Italy and the USA. Some analysts

and media outlets claimed in March 2020 that this awful disease will have an effect on the stock
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market of the affected countries. Zuo, Wang and Zhao (2020) point out that these small and

medium-sized businesses, which play a significant role in China, have been seriously impacted

by the downturn in mass demand and restrictive spending on leases, salaries and interests. It may

have a more effect on the health of the financial sector. Once Italy reopened the A-share market

on 3 February, the Lombardy Securities Composite Index deteriorated by almost 8 per cent in

reaction. The actual effect of this case to date on the Italian stock markets is discussed in this

paper.

The influence of COVID-19 on the German and US stock markets has a back

flow impact on the Italian stock markets, particularly the Italian stock market. Just as the spread

of the virus in Italy has progressively stabilized, the spread of the disease in other countries has

continued. In the middle of this global expansion, the Italian stock market has sustained a

glancing blow owing to the spillover impact. However, if we remove the case of Italy in the brief

occurrence time frame of the domestic period, there is no proof that COVID-19 has a significant

effect on the big stock indices of other countries relative to the S&P 1200 Global Index.

Motivation and Objective of the Study:

Globally, the COVID-19 shock is extreme relative to the Great Financial Crisis of 2007-

08. Nevertheless, the effect of the COVID-19 on capital markets has never been studied. Various

monetary International bodies and outlets have warned of the latest developments.COVID-19

would have significant consequences on the world economy which could well have an impact on

the current economic crisis more than of 2007/2008. The World Economic Forum emphasized

that "worldwide, the corona virus shock is serious as compared to the Great Financial Crisis in

2007 –08"

Objective of the Study:

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The present study is to examine the effect of COVID-19 on the financial markets in Italy.

Research Methodology

The following equity indexes are chosen to analyze the effect of COVID-19: the CSI 300

Index representing the republic of china, the FTSE MIB Index representing Italy, the Korea

weighted average representing South Korea, the CAC-40 Index representing France, the SMSI

Index representing Spain, the DAX Index representing Germany, the Nikkei 225 Index

representing Japan, and the S&P 500 Index representing USA. Such indexes are perhaps the

most common indicators of the capital exchanges in these countries affected by the virus in the

international news.

The research used Simple Regression with double Log & Semi Log Linear Models to

analyze the effect of COVID-19 on the Italian financial markets. The nature of the analysis is

concise and empirical using the quantitative approach used by Microsoft Office Excel 2016. The

study used the following equation to analyze the effect of COVID-19 on the stock markets:

LnYt = α0 + β1 CNF/Ct + e1t …………………….………………. (1) where, lnY is the natural

log of Dependent Variable, CNF/C is COVID 19 Confirmed cases. The α0 is constant, and β 1, is

The coefficient parameter

The link between COVID-19 reported cases and the Italian Financial Stock Exchange was

calculated by using the equation:

ITEt = α0 + β1 CNF/Ct + e2t ……………………………………. (2) Where ITE t is the

Natural log of the Italy Stock Financial Market.

Results and Discussion:

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The present research used systematic and analytical methods to analyze the effect of COVID-19

on the stock markets in Italy from 1 April 2020 to 25 April 2020.

V C STD T P
CONF. covid-19 2.64 1.0736 2.4589 0
CN 17..659 0
R-S 0.2089
A.R.S 0.1745
S.E.O 694.4
NOB=25

Where V is Variable, CONF COVID - 19 is the Confirmed Cases in Italy, C is the

Coefficient, STD is the Standard deviation, T is the T-statistic, P is the probability, and CN is

Constant, RS is the R Square, A.R.S is the Adjusted R - Square, S.E.O is the standard error of

Estimation, and NOB is the number of observation.

Summary of Findings:

The results of the analysis showed that there was a strong substantial association between the

COVID-19 reported cases and all financial markets in Italy from 1 April 2020 to 25 April 2020.

This means that the COVID-19 had a major impact on the stock markets in Italy from 1 April

2020 to 25 April 2020.

Conclusion

The case study is carried out to examine the effect of COVID-19 on the stock markets in

Italy from 1 April 2020 to 25 April 2020. From the current literature, this research will produce

new information on the effect of COVID-19 on the financial market in Italy from 1 April to 25

April 2020. Most notably, the research would be very helpful to the Financial Applied
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Economics Main Research and will benefit investors and decision-makers in the Italian

community. The results of the analysis found that there is a strong substantial association

between the COVID-19 reported cases and all financial markets in Italy. This means that the

COVID-19 had a major impact on the stock markets in Italy from 1 April 2020 to 25 April 2020
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References

ZEREN, F., & HIZARCI, A. (2020). The Impact of COVID-19 Coronavirus on Stock Markets:
Evidence from Selected Countries. Muhasebe ve Finans İncelemeleri Dergisi, 3(1), 78-
84.
Liu, H., Manzoor, A., Wang, C., Zhang, L., & Manzoor, Z. (2020). The COVID-19 outbreak and
affected countries stock markets response. International Journal of Environmental
Research and Public Health, 17(8), 2800.
Aslam, F., Mohti, W., & Ferreira, P. (2020). Evidence of Intraday Multifractality in European
Stock Markets during the recent Coronavirus (COVID-19) Outbreak. International
Journal of Financial Studies, 8(2), 31.
Ru, H., Yang, E., & Zou, K. (2020). What do we learn from SARS-CoV-1 to SARS-CoV-2:
Evidence from global stock markets? Available at SSRN 3569330.
Ozili, P. K., & Arun, T. (2020). Spillover of COVID-19: impact on the Global Economy.
Available at SSRN 3562570.
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Question 2.

Modern Portfolio Theory (Harry Markowitz)

Modern portfolio theory offers an overview of how non-risk investors should build
portfolios to optimize expected returns depending on their market risks. This theory was
developed by Harry Markowitz in his paper "Portfolio Selection," published in journal of
Investment in 1952. His dissertation on contemporary portfolio analysis was eventually awarded
a Nobel Prize.
Modern portfolio models suggest that the risk and return features of an investment should
not only be interpreted, but measured by how the investment influences the costs and returns of
the total portfolio. MPT shows that an investor can create a multi-asset portfolio that maximizes
returns at a given risk level (Fabozzi, F. J et.al, 2002). In addition, an investor can create the
portfolio with the lowest possible risk, provided a target amount with projected return. The
success of an individual investment is less important than whether it has effect on the whole
portfolio, according to statistical indicators such as variance and correlation
MPT assumes that buyers are risk-averse, which means for a given amount of return they
prefer a less volatile portfolio. Risk aversion, in fact, means most individuals engaging in
different asset groups. The estimated portfolio return is measured as a weighted value of the
yield on each asset (Rom, B. M., & Ferguson, K. W, 1994). If four evenly weighted assets were
included in a portfolio and the projected returns were 3, 5, 9 and 15 per cent, the estimated
portfolio return will be:
(3% x 25%) + (5% x 25%) + (9% x 25%) + (15% x 25%) =0.08 %

Capital Structure Theory (Modigliani and Miller Approach)

Modigliani and Miller, two scholars in the 1950s, researched capital-structure theory
intensively. The capital-structure irrelevance idea was built from their research. Essentially, they
believed that it does not matter what financial system a corporation requires to fund its activities
in great markets. They argued that the market value of a company is calculated by its generating
power and the vulnerability of its underlying properties, and that its valuation is independent of
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the manner in which it decides to fund its acquisitions or to pay dividends. The basic proposal for
M&M is based on the following main assumptions:
• No taxes;
• No risk of purchases
• No risks of fraud
• Equivalence of funding rates for all businesses and investors;
• Consistency of business statistics, implying that businesses and consumers have the same
statistics.
• No effect of the debt on the profits of a corporation before interest and taxes
Modigliani and Miller’s contribution to capital analysis, formulated in the 1950s,
supports the idea of market system irrelevance (Yapa Abeywardhana, D, 2017). It means that the
value of a company is unrelated to the financial structure of a firm. If a company is heavily
leveraged or has a lower debt portion, it has no impact on its market valuation. Actually, the
stock worth of a company depends on the company's operating income.
The financial structure of a corporation is the way that the corporation funds its money. A
company can fund its operations either through debt or equity, or through different combinations
of these two sources. The financial structure of a corporation may have a majority of the bond
portion or share capital, but only one of the two components or an even combination of both debt
and equity. Every solution has its own combination of advantages and drawbacks. There are
different theories of capital structure that aim to create a correlation between financial flexibility
of the company and its stock valuation. The Modigliani and Miller Methods are one such
methods.
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References
Fabozzi, F. J., Gupta, F., & Markowitz, H. M. (2002). The legacy of modern portfolio theory.
The Journal of Investing, 11(3), 7-22.
Rom, B. M., & Ferguson, K. W. (1994). Post-modern portfolio theory comes of age. Journal of
Investing, 3(3), 11-17.
Yapa Abeywardhana, D. (2017). Capital structure theory: An overview. Accounting and finance
research, 6(1).