Predicting stock returns in the presence of COVID-19 pandemic: The role of health news

https://doi.org/10.1016/j.irfa.2020.101546Get rights and content

Highlights

  • News during pandemics is crucial for investment decision.

  • The return predictability of health news is examined given the nature of COVID-19.

  • Accounting for health news during pandemics improves stock return predictability.

  • Combining financial news with health news will produce better forecast results.

  • The role of macro variables is crucial in the proposed health news-based model for stock returns.

Abstract

This study derives its motivation from the current global pandemic, COVID-19, to evaluate the relevance of health-news trends in the predictability of stock returns. We demonstrate this by using data covering top-20 worst-hit countries, distinctly in terms of reported cases and deaths. The results reveal that the model that incorporates health-news index outperforms the benchmark historical average model, indicating the significance of health news searches as a good predictor of stock returns since the emergence of the pandemic. We also find that accounting for “asymmetry” effect, adjusting for macroeconomic factors and incorporating financial news improve the forecast performance of the health news-based model. These results are consistently robust to data sample (both for the in-sample and out-of-sample forecast periods), outliers and heterogeneity.

Keywords

Health news
COVID-19
Stock returns
Predictability

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