International Journal of Management Research and Emerging Sciences

Vol 14, No 2, June 2024, PP. 132-150

Pandemics: Government Interventions and Financial Markets Oscillations

Muhammad Waqas
Department of Management Sciences, Bahria University Lahore Campus, Pakistan
waqascheema30@gmail.com
Adnan Hushmat
Department of Management Sciences, Bahria University Lahore Campus, Pakistan
Hassan Akram
Department of Management Sciences, Bahria University Lahore Campus, Pakistan
hassan.research1@gmail.com

Corresponding: adnan.hushmat@gmail.com
ARTICLE INFO
Article History:
Received: 26 Jan, 2024
Revised: 20 Mar, 2024
Accepted: 25 May, 2024
Available Online: 28 Jun, 2024
DOI:
https://doi.org/10.56536/ijmres.v14i2.584
Keywords:
COVID-19; Pandemics, Financial
Crisis, Government Interventions;
Financial Markets, Stock Markets
JEL Classification:
G1
ABSTRACT
The outbreak of the COVID-19 pandemic was highly contagious and
people from almost more than 165 countries were affected by this virus.
The pandemic has upended daily routines and business operations in an
unprecedented manner, unlike any event in modern history. In response,
governments worldwide have implemented policies and measures related
to pandemic aimed at instilling stability. Although the pandemic is over,
there are news about the new variants of Covid that may go uncontrolled
and the world may again enter into the Covid-19 like situation. During
Covid-19, governments from all the countries took various measures like
the execution of lockdown, emergency, public safety announcements,
health measures, and income support packages to support the people. This
study investigates the impact of government interventions on fifteen equity
and debt markets around the world during time of Covid-19. The
methodology of event study is used in this research. A comparative study
has been conducted between high-income, upper-middle-income, and
lower-middle-income countries, using the stock and bond markets data.
The findings show the impact of lockdown announcements and policy rate
changes on bond markets of high-income countries is not much significant
whereas upper middle & lower-middle-income countries adversely
responded to the government announcements. On the other hand, stock
markets of all the countries showed a negative reaction to the lockdown
announcements, however, the intensity of the negative effect of reduction
in policy rate is more severe in the high-income countries as compared to
the upper middle & lower-middle-income countries.
© 2024 The authors, under a Creative Commons Attribution-Non-Commercial 4.0.

INTRODUCTION
COVID-19 has been the most extraordinary event of the 21st century. The pandemic
drastically affected our social and economic system. Its spread to many other countries in January
2020 was rapid and disastreous. The increase in cases and deaths caused the Chinese Government
to take quick action against the virus. The whole world was shocked when the lockdown was
announced in Wuhan in January 2020. The lockdown proved to be very effective to control the
spread of COVID-19. After a few days, WHO(World Health Organization) called it as Public

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Health Emergency of International Concern (PHEIC) (Zhang et al., 2020). South Korea and Iran
were among the first affectees after China.
The quick global outspread of the COVID-19 virus disrupted the routine life of citizens around the
world. Financial markets also witnessed a significant adverse effect of COVID-19 after the 2007-
09 crises. The services sector in USA suffered more being highly labour intensive sector from
negative impacts of Covid-19 prevention policies (Lescure et al., 2021). The Governments in every
country took precautionary policy measures and initiatives to respond to this catastrophe. These
initiatives serve not only to reassure the general public but also to bolster the confidence of
financial investors. By providing a sense of direction and predictability, these measures enhance
investors' faith in the future trajectory of businesses despite the prevailing uncertainties (Chen et
al., 2023). While there is a prevailing notion that the effects of Covid-19 should be uniform across
global stock markets, empirical analyses on this matter are scarce. For obtaining a different
perspective, research also provides evidence on the repercussions of Covid-19 on the stock markets
of Gulf countries from September 2019 to July 2020. The results indicate that Covid-19 exerted a
negative short-term influence on the Gulf stock markets. Additionally, the stock markets of Gulf
nations experienced comparatively lesser impacts compared to the adversities witnessed by global
stock markets (Salman & Ali, 2024). These results provide us basis for developing a hypothesis
that Covid-19 had diverse impacts on different markets in different countries.
Sakariyahu et al. (2021) observed that markets exhibit varied responses to positive and negative
news, reflecting reactions to both internal and external incidents. Consequently, comprehending
the drivers behind market behavior, especially a pandemic is crucial for investment and economic
analyses. Firstly, for investors seeking to mitigate risks amidst pandemic, an accurate measure of
market behavior offers insights into suitable diversification strategies for hedging long-term
exposures. Secondly, during a global pandemic, financial assets become risky due to investor
sentiments influenced by widespread uncertainties. Thus, estimating how financial markets
respond to investor attitudes during crises helps firms mitigate potential downside risks associated
with investment decisions (Paterson et al., 2024). The confirmed COVID-19 cases had a negative
impact on stock returns as soon as they increased and caused a downward trend in the performance
of stock markets due to the pandemic (Al-Qudah & Houcine, 2022).
The study focuses on analyzing the impact of government announcements of lockdown and policy
rate changes on the investment in equity markets (EM) and debt markets (DM) in high-income,
upper middle-income, and lower middle-income countries.

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LITERATURE REVIEW
The world economy faced worst crises during this pandemic situation since 1930’s Great
Depression, stock markets reponse elevated the worries in pandamic (Capelle-Blancard &
Desroziers, 2020). There was a considerable percapita income decline for countries like Pakistan,
India and Bangladesh (Zahoor et al., 2024). China initiated a prompt resoponse to COVID-19 by
making an investment of Chinese Yuan 3.33 trillion in banking industry through open market.
Further, United states of Americe also adopted some monetary and fiscal policy actions which
included USD 484 billion Paycheck Protection Program and almost USD 2.3 trillion Coronavirus
Aid. Morover, United States of America also approved Relief and Economic Security Act which
aimed at supporting small and medium enterprises. European Central Bank (ECB) arranged to give
monetary policy support member countries in year 2020 which amounts to EURO One Hundred
Billion for additional asset procurement for each country as a relief. The Bank of Canada has
lowered the immediate policy rate with a considerable percentage of 150 bps in March 2020
(Rizwan et al., 2020).
During the initial stages of the pandemic, the potential harm it could inflict was largely
unpredictable. Companies grappled with uncertainty about potential disruptions, making it
challenging to maintain a suitable outlook of the market. During pressure of pandemic,
governments’ immediate reponse and actions around the globe reduced some pressure on markets.
Many studies observe thorough effects of the pandemic on the stock market (He et al., 2020; Liu
et al., 2020), there has been some government interventions which didn’t have effects as were
expected. To have positive impact of public policy actions at Government level, confidence must
be developed pubmlically and assurances be provided that situation will remain in control while
facing situatioons like COVID-19. This may also imply expectations of companies and markets
receiving assistance in times of need, as observed in many countries (Chen et al., 2023).
Matters like minimum wages, and interation at market places were well implemented bu
governments, however they have been criticized and debated extensively aroud the globe.
Consequently, their announcements did not elicit significant stock market reactions. After
implementation of these actions regarding pandemic, the expectation were that restrictions
regarding human resource adopted through pandemic control policies will result in unexpected
abnormal stock returns, which will impct productivity. Before the pandemic, measures like social
distancing, quarantines, and restrictions on travelling were largely unprecedented. These
emergency actions by governments appeared as a surprise particularly for manufacturing industries
heavily labor intensive (Baker et al., 2020). As a result, we saw these industries to experience
surprise returns in response to such pandemic-induced actions.
Many academic studies have been conducted to analyze the impact of COVID-19 on financial
markets. (Ashraf, 2020a, 2020b) studies the expected economic impact of government
interventions in 77 countries by analyzing the effects of such actions on the stock market,
concluding a significant impact of government interventions over stock market returns during

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COVID-19. Moreover, stock market returns tend to decline as the number of confirmed cases of
COVID-19 increases. Stock market had shown more reaction as much as cases of covid increased
as compared to rise in deaths. Shehzad et al. (2020) finds a considerable and damaging impact on
stock returns of the S&P 500; however, it shows an insignificant impact on the Nasdaq Composite
index. Okorie & Lin (2021) finds a fractal contagion effect of COVID-19 on the stock market.
Moreover, the fractal contagion effect fizzles out over the middle and long run time for volatility
and the stock market. Rizwan et al. (2020) show a sharp increase in systemic risk during COVID-
19, however, a flattened systemic risk curve is observed after that the threat of COVID-19 has
passed away.
Zaremba et al. (2020) finds that the government intervention has a direct positive impact over
COVID-19 cases that were confirmed coupled with indirect negative impact on financial market
returns. Zhang et al. (2020) show that the US policy rate changes and quantitative easing measures
create some uncertainties in financial markets. Some other studies like (Norden, Roosenboom, &
Wang, 2013; Tooze, 2020) also analyzed the impact of government policy rate reduction on stock
markets and other government interventions on corporate borrowings and bonds markets,
respectively. Lyócsa and Molnár (2020) studies the equity and debt market volatilities and finds
increased volatility in the financial markets.
To the best of our knowledge, we have not found any academic research that analyzes the impact
of government announcements of policy rate changes and lockdown on the debt markets during
COVID-19. The study jointly analysis the impact of government lockdown announcements and
policy rate changes on equity and debt markets. Moreover, it provides an in-depth analysis of the
impact on the high income, upper middle-income, and lower middle-income economies. Since the
severity of COVID-19 is different in various countries, it is pertinent to see how the equity and
debt markets respond to the announcements that different income group economies made in
response to the COVID-19 pandemic.
This was a brief introduction to the study. The next section focuses on the data and methodology
of the study. Later on, the findings and discussion section are provided followed by the conclusion
of the study.

DATA AND METHODOLOGY

The study uses daily data of stock indices and government bonds from 15 countries over
the period from December 2018 to December 2020. Firm performance is efficiently exhibited in
data of stocks being traded on stock exchanges (Ali & Fatima, 2021). MSCI stock indices and JP
Morgan bond market indices are used. Based on the WESP (World Economic Situation and
Prospects) report of the United Nations Development Policy and Analysis Division, the countries
are categorized into high-income, uppermiddle-income, and lowermiddle-income countries. Table
2.1 shows the countries' list along with the respective dates of government announcements for
lockdown and policy rate changes.

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Table 2.1. Dates of Government Announcements for Lockdown and Policy Rate Changes
COUNTRY EVENT 1 DATE EVENT 2 DATE
Govt. Announcement of Govt. Announcement of Policy Rate Changes
LD
High Income
USA 22/03/20 17/03/20
UK 23/03/20 10/03/20
GERMANY 23/03/20 19/03/20
ITALY 9/03/20 12/03/20
FRANCE 17/03/20 19/03/20
Middle Income
TURKEY 23/04/20 20/04/20
BRAZIL 17/03/20 15/02/20
MALAYSIA 18/03/20 5/03/21
MEXICO 23/03/20 24/03/20
ROMANIA 25/03/20 23/03/20
Lower-Middle Income
PAKISTAN 24/03/20 6/05/20
INDIA 25/03/20 27/03/20
SRI LANKA 18/03/20 17/06/20
MOROCCO 19/03/20 15/07/20
BANGLADESH 26/0320 13/07/20

Event Study Methodology (ESM), introduced by Fama, Fisher, Jensen & Roll (1969), is used. An
event study is a statistical method to check the impact of an event (Binder, 1998). It is commonly
used to examine the market reactions to extraordinary events. Aizenman et al. (2016) used this
methodology to make comparisons between stock markets and bond markets. The ESM consists
of the following steps: identify the event, calculate the expected normal returns (R), calculate and
analyze the abnormal returns (AR) with the mean-adjusted return, calculate and analyze the
abnormal returns (AR) with the market model, calculate and analyze the cumulative abnormal
returns (CAR), calculate and analyze the cumulative average abnormal returns (CAAR), and
testing hypothesis.
Two events, the government announcement of lockdown (LD) and policy rate changes
(PR), are identified for each of the countries. The first event date has been defined as LDt = 0 and
the second event date as PRt=0. This event is known as the ‘event window’.
‘Pre-Event window’ period is based on a normal period of 14 days before the event date.
This framework is used to examine the mean of the longer period from the date data collected to
the event date & based on these abnormal returns is estimated beside this intercept and slope of
the asset valuation model have been computed that will further used in the market-adjusted returns
model (Chowdhury & Abedin, 2020). The exact pre-event window dates vary from country to
country. The pre-event window for the event LD is represented as LDt1 & for event PR as PRt1.

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‘Post-Event window’ is the period after event day. It comprises 15 days after 0 days of LDt
& PRt. The exact post-event window dates vary from country to country. The post-event window
for LD is shown as LDt2 and PR as PRt2. In this total number of days to estimates, the events are
30 (14+1+15) days.
-14 DAYS 0 DAYS +15 DAYS

PRE-EVENT WINDOW EVENT WINDOW POST-EVENT WINDOW

‘Estimation window’ is the window before the event period and it is used to calculate the normal
return of the stocks & bond markets. The estimation choice window is subjective. For
example,Brown and Warner (1980) uses 35 months & Renneboog (2006) takes 240 days as an
‘estimation window’. The ‘Estimation window’ data is from 10 Dec 2018 to event window that
falls in the year 2020 & varies from country to country but not less than 450 days. Similarly, the
event window is 30 days that is not a short period to analyze event impacts and market oscillations.
The estimation periods are represented as LDT1, LDT2, PRT1 & PRT2. The expected normal
return is the normal returns of the stock index of each country, which has been calculated as the
average or mean of the estimation window.

T1 T2 t1 t=0 t2

Event Window
Estimation Window

𝑻𝟐
𝟏
𝑵𝑹𝒊 = ∑ 𝑹𝒊𝒔
𝑻
𝑺=𝑻𝟏

In this equation, i is the NR of the stock index of any categorized country. T is equal to T2-T1+1
which equal to estimated window days. To find out the expected/average normal return there is a
need to find out the daily returns of stock prices. To find out daily stock returns the following
formula is used,
𝑷𝒊.𝒕 − 𝑷𝒊.𝒕−𝟏
𝑹𝒊𝒕 =
𝑷𝒊.𝒕−𝟏

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Ri,t is the stock return on the day t (time) and stock index t. Pi,t is the stock price on the day, and
Pi,t-1 is the stock price of the previous day.
To calculate the abnormal return of stocks, two famous models have been used in this research,
mean-adjusted returns and the market model (Bash, 2020).
To find out the stock market & bond market oscillations, the abnormal returns of the stock are
calculated. Abnormal return is the difference between NRi (normal return) and Rit (return of the
day-actual return).

𝑨𝑹𝒊.𝒕 = 𝑹𝒊.𝒕 − 𝑵𝑹𝒊.𝒕

ARi.t is the abnormal return of stock i on the day t. Ri.t (return of the day-actual return) of the stock
i on the day t.
Besides the mean-adjusted returns, the most frequently used market model is used to calculate and
authenticate the accuracy of estimations and analysis of abnormal returns AR ((Bash, 2020; Brown
& Warner, 1985; Dodd & Warner, 1983). It can be represented as,

𝑨𝑹𝒊.𝒕 = 𝑹𝒊.𝒕 − (𝜶𝒊 + 𝜷𝒊𝑹𝒎𝒊. 𝒕)

where Ri.t (return of the day-actual return) of the stock i on the day t. α & β are the regression
coefficients of the estimated period that is not less than -450, -14 days, obtained by the ordinary
least square method. Rmi.t represents return of the MSCI all-country index and the return of the JP
Morgan government bond funds index (JPMGB).
The study is the estimation of the performance of an interval, so aggregative results of the
abnormal returns of mean-adjusted return and market model have been collected between period
LDt1, PRt1, LDt2 & PRt2.
𝒕=𝒕𝟐

𝑪𝑨𝑹𝒊 = ∑ 𝑨𝑹𝒊𝒕
𝒕=𝒕𝟏

After calculating the CAR of all the markets, this study performs William Sealy Gosset (1908 ) t-
test (Raju, 2005). It tests if lockdown and reduction in policy rate events have influenced the value
of the returns of stock & debt markets. The following null hypothesis is tested.
H0 : CAR = 0 & H1 : CAR ≠ 0
The null hypothesis shows that the lock-down & policy rate change announcements do not
influence the valuation of the financial markets.
The test statistics of the t-test can be represented as below,

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̅ − 𝝁𝟎
𝒙
𝒕= 𝒔
√𝒏
where n is the sample size, s is the standard deviation, the degree of freedom is n-1 is used in this
test. µ0 is the overall average value of CAR.

RESULT AND DISCUSSION

This section presents the results of the study along with a discussion.
Impact of LD on EM
Figure 4.1 shows the empirical results of the impact of government lockdown announcements on
investment in the equity markets. The results of AR and CAR using return that is mean-adjusted
(MAR) Market adjusted (MKAR) and Risk-adjusted (RAR) which are presented in the graph. The
horizontal axis shows the number of days of event LDt1 to LDt2 whereas the vertical axis represents
a percentage gain or loss on investments in stock indices. The figure shows that all the stock indices
in AR have medium-type general trends that are falling and rising between event periods LDt1 to
LDt2. results are very moderate; investors are not much sure about the exact market reaction.
Whereas if we look into the CAR of all classes, there is the significant impact of the event1 on the
stock markets of all classes. Graphs are suggesting that aggregated results are negative and the
market has declined at position LDt0, the fear to lose investments is almost going to convert into
reality as bad news spread in the markets. MAR & RAR are the worst for high-income countries
that have declined to almost 30% on the event day. Similarly, both lower-middle-income and
upper-middle-income countries declined to approximately 24% and 19%, respectively.
This represents that the lockdown announcements affect the equity markets of high-income
countries more as compared to the other two groups. However, in the phase of LDt2 window, all
three classes are covering their investments by going back to 0% losses with the same trend as they
went downward. Yet the statistical results provide mixed results in ARi.t, and negative results in
CAR.

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Source: Investing.com

Figure 4.1: MAR, MKAR & RAR of Equity Markets on Lockdown Announcements

The results regarding paired-two samples t-test for mean on MAR, MKAR & RAR are shown in
table 4.1. The mean returns are negative in the pre-event window showing a negative trend in the
market before the event. Whereas the post-event returns show the sign of recovery. The p-values
of all models are less than the 5% level of significance, showing a significant impact of lockdown
event on equity markets in all the countries.

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Table 4.1: Test Results of Difference between Pre-Event & Post Event Means
LD-EM
P-
MEAN STD. DEV. T-TEST VALUE
PRE- POST- PRE- POST-
EVENT EVENT EVENT EVENT
MAR-A CLASS -0.0192 0.0067 0.0005 0.0004 -3.3832 0.0023
MAR-B CLASS -0.0139 0.0053 0.0004 0.0006 -2.2875 0.0305
MAR-C CLASS -0.0171 0.0044 0.0003 0.0001 -4.5145 0.0001

MKAR-A CLASS -0.0129 0.0243 0.0004 0.0003 -5.0239 0.0002

MKAR-B CLASS -0.0119 0.0176 0.0005 0.0010 -2.9598 0.0111
MKAR-C CLASS -0.0150 0.0165 0.0003 0.0002 -4.7349 0.0004

RAR-A CLASS -0.0186 0.0084 0.0004 0.0003 -3.9788 0.0016

RAR-B CLASS -0.0132 0.0078 0.0004 0.0006 -2.2898 0.0394
RAR-C CLASS -0.0166 0.0061 0.0003 0.0001 -4.5454 0.0005
“A” shows (High-Income Countries), “B” shows (UpperMiddle-Income Countries) and “C” shows
(LowerMiddle-Income Countries)

Impact of LD on DM
Debt markets are less risky as compared to equity markets. That is why they exhibit lower
volatility as compared to equity markets. Figure 4.2 shows the impact of lockdown announcements
on the debt markets of high-income countries, uppermiddle-income countries, and lowermiddle-
income countries. It shows AR and CAR results using mean-adjusted return (AR) and the market-
adjusted return (MKAR) and risk-adjusted return model (RAR) from debt markets. The X-axis
shows the number of days of event LDt1 to LDt2, whereas, Y-axis represents the percentage
gain/loss over investments in bond indices. A downward slope can be seen on the event date in the
AR of the bond indices of the B & C groups. On the other hand, in the A group, there are general
trends that are falling and rising between event periods LDt1 to LDt2. Investors in the debt markets
of the developed economies seem to be less concerned about COVID-19 and the government lock-
down announcements as compared to the investors in the other two groups.

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Source: Investing.com

Figure 4.2: MAR, MKAR & RAR of Debt Markets on Lockdown Announcements

The high impact of the event of lockdown can also be validated from the results of CAR from B
& C-class countries. The debt market trend in B & C class countries is negative and the intensity
of the downward trend is high. The fear of loss of investments is almost going to convert into
reality as bad news spread into the markets. The worst situation is for class C countries that have
been declined to 12% on the event day. The debt markets of the group B countries also show a
significant decline of 8%. However, the debt markets of group A exhibit a minor decline of 0.05%.
It shows that the government lockdown announcements affected the developing markets more as
compared to the developed ones. In the phase of the LDt2 window, all the markets recovered their
losses within a short span.

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Table 4.2 Test Results of Difference between Pre-Event & Post-Event Means
LD-DM
MEAN STD. DEV.
PRE- POST- PRE- POST- P.
EVENT EVENT EVENT EVENT T-TEST VALUE
MAR-A CLASS 3.2E-05 -5.3E-05 2.2E-06 1.1E-06 1.6E-01 8.8E-01
MAR-B CLASS -2.1E-03 1.1E-03 4.5E-04 2.7E-04 -4.4E-01 6.7E-01
MAR-C CLASS 6.7E-04 -4.4E-03 2.7E-05 6.7E-05 2.2E+00 4.3E-02

MKAR-A
CLASS 1.0E-03 -2.4E-03 1.0E-06 1.4E-06 6.7E+00 1.4E- 05
MKAR-B
CLASS -4.5E-03 4.3E-04 4.4E-04 2.9E-04 -6.5E-01 5.3E- 01
MKAR-C
CLASS -3.1E-04 -3.9E-03 2.5E-05 7.2E-05 1.6E+00 1.3E- 01

RAR-A CLASS 5.1E -05 -5.0E -05 2.2E -06 1.1E -06 1.8E -01 8.6E -01
RAR-B CLASS -2.5E -03 1.0E -03 4.4E -04 2.8E -04 -4.7E -01 6.5E -01
RAR-C CLASS 9.4E -04 -4.6E -03 2.9E -05 6.6E -05 2.4E +00 3.0E -02
“A” shows (High-Income Countries), “B” shows (UpperMiddle-Income Countries) and “C” shows
(LowerMiddle-Income Countries)
The results of the paired-two samples t-test for mean on MAR, MKAR & RAR are elaborated in
table 4.2. In the pre-event mean column, upper-middle-income countries' values are negative
showing a negative trend in the market before the event, whereas, high income & lower-middle-
income countries' pre-event values are positive. The p-values of MKAR and RAR of group C show
a significant difference between the daily returns. On the other hand, the p-values MKAR of group
A also show a meaningful difference among pre-event daily returns and post-event daily returns.
Impact of PR on EM
Most of the governments announced and revised the monetary policies for the wellbeing and
welfare of the society to support the economy during COVID-19. Figure 4.3 shows, AR and CAR
results using the mean-adjusted return (MAR) and the market model (MKAR) and similarly the
risk-adjusted return model (RAR) from the equity market on the announcement of government for
a reduction in policy rates. The X-axis shows the number of days of event PRt1 to PRt2, whereas,
the Y-axis represents the percentage gain or loss over investments in stock indices. The abnormal
returns of the B & C group show a downward slope on the event date. However, a much stronger
adverse effect can be seen in group A markets. There are abnormal downward trends that are
falling day by day till event day 0. After the event day, the market started recovery between event
periods PRt1 to PRt2. Investors in group A equity markets seem to be more concerned as compared
to the other groups.

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Source: Investing.com

Figure 4.3: MAR, MKAR & RAR of Equity Markets on Policy Rate Announcements

The negative reaction of the stock markets is more severe in group A as compared to other groups.
It declined to 32% on event day, whereas, group B and group C declined by 11% and 2%,
respectively. However, in the phase of the LDt2 window, all the markets recovered their losses
within a short span.

The results of the paired-two samples t-test for mean on MAR, MKAR & RAR are inserted in
table 4.3. In the pre-event mean column, values of all countries are showing a negative trend in the
market before the event. On the other side, post-event mean results are positive representing an
upward trend. Pre and post-event MAR and MKAR are significantly different only for group A
equity markets. However, pre and post-event RAR are significantly different for both group A and
group B markets. The results show that the policy rate reduction announcement affected the high-
income countries’ equity markets more as compared to the others.

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Table 4.3: Test Results of Difference between Pre-Event & Post-Event Means
PR-EM
MEAN STD. DEV.
PRE- POST- PRE- POST- P.
EVENT EVENT EVENT EVENT T-TEST VALUE
MAR-A CLASS -0.02142 0.00715 0.00058 0.00053 -2.81058 0.01473
MAR-B CLASS -0.00581 0.00510 0.00022 0.00047 -1.79576 0.09580
MAR-C CLASS -0.00141 0.00252 0.00013 0.00006 -1.10865 0.28767

MKAR-A
CLASS -0.01890 0.02369 0.00044 0.00116 -3.48405 0.00404
MKAR-B
CLASS -0.00196 0.01042 0.00050 0.00054 -1.42601 0.17744
MKAR-C
CLASS 0.00234 0.00479 0.00020 0.00024 -0.45063 0.65968

RAR-A CLASS -0.02009 0.01054 0.00052 0.00060 -3.03557 0.00956

RAR-B CLASS -0.00562 0.00687 0.00021 0.00044 -2.20182 0.04634
RAR-C CLASS -0.00198 0.00219 0.00014 0.00006 -1.14470 0.27297
“A” shows (High- Income Countries), “B” shows (UpperMiddle-Income Countries) and “C” shows
(LowerMiddle-Income Countries)
Impact of PR on DM
The policy rate is the key determinant of the bond market of any country. Government
announcement to policy rate changes directly affects the debt markets. Figure 4.4 shows that AR
and CAR results using mean-adjusted return (MAR) and market model (MKAR) and further the
risk-adjusted return (RAR) from bond markets on the government’s announcement for a reduction
in policy rates. The X-axis shows the number of days of event PRt1 to PRt2, whereas, the Y-axis
shows the percentage gain/loss over investments in bond indexes. It is evident that the bond
markets of group B & C showed more adverse reactions as compared to the group A markets.
The high impact of the event of a reduction in policy rate can also be validated from the results of
CAR from A-class countries. Stock market trends in A-class countries are negative and the
intensity of the downward trend is fast. The fear of loss of investments is almost going to convert
into reality as bad news spreads into the markets. The worst situation is in group C that shows a
decline of almost 21% on the event day followed by a decline of 5% and 0.10% in groups B and
C, respectively. However, this downward trend in C & B class countries cannot stop and it seems
that investors are pulling back their investments, it is evident from the downward trend in CAR in
the second phase.

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Source: Investing.com

Figure 4.4: MAR, MKAR & RAR of Debt Markets on Policy Rate Announcements

The results of the paired-two samples t-test for pre and post-event means of MAR, MKAR & RAR
are presented in table 4.4. The p-values show a significant difference between the means of MAR,
MKAR, and RAR of the group C markets at a 5% level of significance, whereas, for group B, they
are significant at a 10% level of significance. On the other hand, there is no significant difference
between the pre and post-event returns for group A. In pre-event mean returns of all markets are
positive, however, after the announcement of a reduction in policy rates there is a sudden slump
in the market and the mean returns turn negative for upper-middle and lower-middle-income
countries. Therefore, it is evident that high income countries markets were more resilliant to policy
rate shocks. In a nutshell, the results show that there is a substantial impact of the reduction in
policy rate event on debt markets on uppermiddle-income and lowermiddle-income markets.
More, precautionary tools were required in these countries before announcing policy rate changes
in lieu of Covid-19 to avoid sudden disaster.

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Table 4.4: Test Results of Difference between Pre-Event & Post-Event Means
PR-DM
MEAN STD. DEV.
PRE- POST- PRE- POST- T- P.
EVENT EVENT EVENT EVENT TEST VALUE
MAR-A CLASS 0.0001 0.0001 0.0000 0.0000 0.0650 0.9491
MAR-B CLASS 0.0076 -0.0029 0.0003 0.0002 1.8251 0.0910
MAR-C CLASS 0.0001 -0.0063 0.0000 0.0001 2.6988 0.0182

MKAR-A CLASS 0.0002 -0.0003 0.0000 0.0000 0.3807 0.7096

MKAR-B CLASS 0.0063 -0.0042 0.0003 0.0002 1.8595 0.0857
MKAR-C CLASS -0.0001 -0.0066 0.0000 0.0001 2.5885 0.0225

RAR-A CLASS 0.0002 0.0001 0.0000 0.0000 0.0943 0.9263

RAR-B CLASS 0.0077 -0.0028 0.0003 0.0002 1.8220 0.0915
RAR-C CLASS 0.0002 -0.0064 0.0000 0.0001 2.6370 0.0205
“A” shows (High-Income Countries), “B” shows (UpperMiddle-Income Countries) and “C” shows
(LowerMiddle-Income Countries)

CONCLUSION AND POLICY IMPLICATION

The study examines and compares the impact of government lockdown announcements and
policy rate reductions on the fifteen equity and debt markets around the world. Since the COVID-
19 impact and market efficiency varies across countries, the sample is selected from high-income,
uppermiddle-income, and lowermiddle-income countries.

Our results depict the impact of lockdown announcements and policy rate changes on bond
markets of high-income countries is not much significant whereas upper middle & lower-middle-
income countries adversely responded to the government announcements. Conversly, stock
markets of all the countries showed a negative reaction to the lockdown announcements, however,
the intensity of the negative effect of reduction in policy rate is more severe in the high-income
countries as compared to the upper middle & lower-middle-income countries. The evidence shows
that the equity markets of high-income countries are more efficient as compared to the
uppermiddle-income and lowermiddle-income countries.
Our findings reveal that international diversification will be useful for the large fund managers and
individual investors to reduce their exposure to systematic shocks like COVID-19. Small investors
can diversify the risk by investing in mutual funds that invest globally.
Combating against COVID-19 involves important role of Governments and their policy initiatives
at public level . Our study validates the impacts and after effects of such measures during the crisis.
There are significant lessons to be learned from the experiences thus far, particularly regarding the

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unintended repercussions of policy announcement and subsequent bond and stock market shocks.
Consequently, governments should adopt a comprehensive risk assessment approach, considering
not only the ramifications for the targeted population but also for other stakeholders, both directly
and indirectly affected in terms of bond and stock markets keeping in view high, low and middle
income countries.
Our research illustrates how policy announcements concerning Covid-19 and subsequent policy
rate fluctuations in different countries triggered ripple effects throughout the stock markets, bond
markets and other financial intsitutions causing severe disruptions for investors and stakeholders.
Governments should also offer guidance regarding markets, relevant risks, diversified investment
and particularly utilization of financial resources for investment duering Covid like situations. This
proactive approach can ensure stable cash flow and balanced investment portflio during
emergencies, thereby mitigating risks regarding disruptions like COVID-19. Moreover, domestic
bond and equity markets development has to be urgent priority of Governments especially in low
and middle income countries specially. The process of automation and similarly ditization of stock
markets with help of public policies can be of great importance. Further, subsidies can strengthen
resilience in this ragard. Several countries have already initiated such efforts in different sectors in
response to the pandemic like the United State executive order on America's supply chains (The
White House, 2021).
Lastly, The response of Government are placed to meaningfully impact national economies and
stock markets. Some degree of uncertainty is inevitable during Covid like situations, policymakers
should take precautions for economic ramifications. Comprehensive information gathering from
diverse sources is crucial for disaster prevention and mitigation. Timely dissemination of this
information to the public enables individuals and firms understand potential policy changes and
adequately prepare for any emergency.

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