Abstract:
This study examines the impact of COVID-19 pandemic, the resulting investor sentiment in
determining stock returns of different sector portfolios, namely, healthcare,
telecommunication, banking, insurance, and hotel companies in the Colombo Stock
Exchange (CSE), Sri Lanka in the year 2020. The empirical work is drawn on two widely
used event study and regression-based econometric analysis. Firstly, the event study
methodology focuses on the impact on sector portfolio returns after the World Health
Organisation (WHO) declared COVID-19 as a global pandemic on 11
March 2020.
Statistically significant positive cumulative average abnormal returns (CARs) are observed
surrounding the event day. The most striking phenomenon is positive and persisting CARs
perceived after a long Island-wide lockdown curfew, which imposed with effect from 16
March 2020, is lifted on 11
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May 2020. CSE investors are likely to be more sensitive to
local events than to global news, and persisting CARs indicate market inefficiency. A
second-stage regression-based methodology is adopted to evaluate the impact of pandemic
related news and to identify the influence of investor sentiment on sector portfolio returns
and its persisting effects. Results reveal an initial negative sentiment effect on portfolio stock
returns, followed by a positive sentiment thereafter. Initial negative effect is relatively robust
on banks and hotel sector stock returns. A positive sentiment might emanate from overreaction
to the subsequent rebound with the removal of lockdown curfew and the
Government’s COVID-relief moratorium packages offered to businesses. Results indicate
that CSE investors are likely to react with investment decisions based on psychological bias
or sentiment, signifying irrational investor behaviour in CSE. This study provides current
findings of investor sentiment, provoked by COVID-19 pandemic, on different sector
portfolio returns in the frontier market, CSE, Sri Lanka.
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Citation:
Rathnasekara, R.D. (2022). Pandemic outbreak, investor sentiment and stock market reaction :evidence from the frontier market, Sri Lanka [Master's theses, University of Moratuwa]. Institutional Repository University of Moratuwa. http://dl.lib.uom.lk/handle/123/21213