ed

COVID-19 E¤ects on the S&P 500 Index

iew
Hakan Yilmazkuday

ev
First Version: March 16th, 2020
This Version: August 10th, 2020

r
er
Abstract

This paper investigates the e¤ects of the coronavirus disease 2019 (COVID-19) cases
pe
in the U.S. on the S&P 500 Index using daily data covering the period between January

21st, 2020 and August 6th, 2020. The investigation is achieved by using a structural

vector autoregression model, where a measure of the global economic activity and the
ot

spread between 10-year treasury constant maturity and the federal funds rate are also

included. The empirical results suggest that having 1% of an increase in cumulative

tn

daily COVID-19 cases in the U.S. results in about 0:01% of a cumulative reduction

in the S&P 500 Index after one day and about 0:03% of a reduction after one month.
rin

Historical decomposition of the S&P 500 Index further suggests that the negative e¤ects

of COVID-19 cases in the U.S. on the S&P 500 Index have been mostly observed during

March 2020.
ep

JEL Classi…cation: F44, G15, I10

Key Words: COVID-19; S&P 500 Index

Pr

Department of Economics, Florida International University, Miami, FL 33199, USA. Phone: 305-348-

2316. Fax: 305-348-1524. E-mail: hyilmazk@…u.edu

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 1 Introduction

ed
The coronavirus pandemic 2019 (COVID-19) has killed 158; 256 people in the U.S. as of

August 6th, 2020, with corresponding COVID-19 cases of 4; 823; 891. This has created a

iew
signi…cant turmoil not only in the global economic activity (e.g., see Baldwin and di Mauro

(2020) or Yilmazkuday (2020)) but also in …nancial markets around the world (e.g., see

Cao, Li, Liu, and Woo (2020)). In the U.S., the S&P 500 Index fell from about 3; 386 on

ev
February 19th, 2020 to about 2; 237 on March 23rd, 2020, corresponding to about 41% of

a fall. Nevertheless, since this reduction in the S&P 500 Index may also be due to other

r
reasons (e.g., the economic activity or interest rates), a formal investigation is required to

er
identify the causal e¤ects of COVID-19 on the S&P 500 Index.

This paper achieves such an analysis by using daily data between January 21st, 2020
pe
(when the …rst COVID-19 case was reported in the U.S.) and August 6th, 2020 (the latest

day available when this paper was written). The formal investigation is achieved by using a

structural vector autoregression (SVAR) model, where the S&P 500 Index is used together
ot

with a measure of the global economic activity (as in Fama (1981), Huang and Kracaw

(1984) or Vassalou (2003)) and the spread between 10-year treasury constant maturity and
tn

the federal funds rate in the U.S. (as in Chen, Roll, and Ross (1986) or Petkova (2006)).

Since COVID-19 is an exogenous shock, percentage changes in cumulative daily COVID-19

rin

cases in the U.S. are included as an exogenous variable in this framework.

Following several early or recent studies in the literature such as by Isserlis (1938), Tin-

bergen (1959), Stopford (2008), Klovland (2002), Kilian (2009), Fan and Xu (2011), Qiu,
ep

Colson, Escalante, and Wetzstein (2012) and Makridakis, Merikas, Merika, Tsionas, and

Izzeldin (2020), the global economic activity is measured by the Baltic Exchange Dry Index
Pr

(BDI). This is a daily published index by the Baltic Exchange in London, and it re‡ects

the shipping costs (due to using vessels of various sizes covering multiple maritime routes)

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 regarding the transportation of raw commodities (e.g., grain, coal, iron ore, copper). Since

ed
these shipping costs are determined by the supply and demand forces in the global market,

they are robust to any speculative manipulation or any government intervention by construc-

iew
tion (e.g., see Bildirici, Kay¬kç¬, and Onat (2015) or Graham, Peltomäki, and Piljak (2016)).

Using BDI as a global economic activity within this framework is also consistent with studies

such as by Graham, Peltomäki, and Piljak (2016) who have shown that changes in BDI are

ev
highly associated with equity returns. Finally, the spread between 10-year treasury constant

maturity and the federal funds rate in the U.S. not only re‡ects the term premium (between

long-run and short-run interest rates) but also the future expectations in the U.S. economy

r
(e.g., see Chen, Roll, and Ross (1986) or Petkova (2006)).

er
The empirical results suggest that having 1% of an increase in cumulative daily COVID-

19 cases in the U.S. results in about 0:01% of a cumulative reduction in the S&P 500 Index
pe
after one day and about 0:03% of a reduction after one month. The latter result is in line

with those in studies such as by Cao, Li, Liu, and Woo (2020) who have shown that the

elasticity of stock market indices with respect to cumulative con…rmed COVID-19 cases is
ot

about 0:028.1 Historical decomposition of the S&P 500 Index further suggests that the

negative e¤ects of COVID-19 cases in the U.S. on the S&P 500 Index have been mostly
tn

observed during March 2020.

The rest of the paper is organized as follows. The next section introduces the estimation
rin

methodology and the data set used. Section 3 depicts empirical results, while Section 4

concludes.
1
ep

However, this paper deviates from Cao, Li, Liu, and Woo (2020) in several aspects: (i) the elasticity
of S&P 500 Index with respect to con…rmed COVID-19 cases in the U.S. after one day (week) is shown to
be signi…cant and about 0:014 (0:035), (ii) the elasticity of the global economic activity with respect to
con…rmed COVID-19 cases in the U.S. after one month is shown to be signi…cant and about 0:073, (iii) the
elasticity of the spread between 10-year treasury constant maturity and the federal funds rate in the U.S.
with respect to con…rmed COVID-19 cases in the U.S. after one month is shown to be signi…cant and about
Pr

0:001, (iv) negative e¤ects of COVID-19 cases in the U.S. on the S&P 500 Index have been mostly observed
during March 2020. It is important to emphasize that due to using a SVAR model, the results of this paper
are also robust to the consideration of changes in the global economic activity as well as the term premium.

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 2 Data and Estimation Methodology

ed
The formal investigation is achieved by using the SVAR model of zt = ( bt ; st ; pt )0

based on daily data, where bt represents the percentage change in BDI, st represents

iew
the percentage change in the spread between 10-year treasury constant maturity and the

federal funds rate in the U.S., and pt represents the percentage change in the S&P 500

Index. Percentage changes in daily cumulative COVID-19 cases in the U.S., denoted by ct ,

ev
are included as an exogenous variable in this framework, since they are not a¤ected by any

economic variables.2

r
The daily data cover the sample period between January 21st, 2020 (when the …rst

er
COVID-19 case was reported in the U.S.) and August 6th, 2020 (the latest day available

when this paper was written). Daily data on BDI are obtained from the web page of Trading
pe
Economics.3 Daily data on the S&P 500 Index and the spread between 10-year treasury con-

stant maturity and the federal funds rate in the U.S. are obtained from the Federal Reserve

Economic Data (FRED of St. Louis Fed).4 Daily data on the COVID-19 cases in the U.S.
ot

are obtained from the European Centre for Disease Prevention and Control.5 For estimation

purposes, all variables are converted into demeaned weekly percentage changes to control for
tn

any seasonality concern by construction.

The series included in the estimation are depicted in Figure 1, where COVID-19 cases in
rin

the U.S. is compared with BDI, the spread between 10-year treasury constant maturity and

the federal funds rate in the U.S., and the S&P 500 Index. As is evident, COVID-19 cases in
2
This estimation approach builds upon a recent study by Yilmazkuday (2020) who investigates the e¤ects
ep

COVID-19 on the global economic activity measured by BDI. This paper deviates from Yilmazkuday (2020)
by directly focusing on the implications for the S&P 500 Index, where the term premium (between long-run
and short-run interest rates) as well as the future expectations in the U.S. economy are controlled for in the
investigation.
3
The web page is https://tradingeconomics.com/commodity/baltic.
4
The web page is https://fred.stlouisfed.org/.
Pr

5
The web page is https://www.ecdc.europa.eu/en/publications-data/download-todays-data-geographic-
distribution-covid-19-cases-worldwide.

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 the U.S. are positively correlated with the spread between 10-year treasury constant maturity

ed
and the federal funds rate in the U.S. during March 2020, they are negatively correlated with

the S&P 500 Index during the same period. Since changes in the S&P 500 Index may also

iew
be due to other reasons, a formal investigation is required to identify the causal e¤ects of

COVID-19 on the S&P 500 Index, as we achieve next.

The formal investigation is based on the following SVAR model:

ev
X
7
Ao zt = a + Ak zt k + ct + ut
k=1

r
where ut is the vector of serially and mutually uncorrelated structural innovations. For

X
7
er
estimation purposes, the model is expressed in reduced form as follows:
pe
zt = b + Bk zt k + ct + et
k=1

where b = Ao 1 a, Bk = Ao 1 Ak for all k, and = Ao 1 . The number of lags (of 7) has

ot

been determined by minimizing the Deviance Information Criterion across alternative lags

(between 1 and 14) of which details are given in Figure 2. It is postulated that the structural
tn

impact multiplier matrix Ao 1 has a recursive structure such that the reduced form errors et

can be decomposed according to et = Ao 1 ut , where the sizes of shocks are standardized to

unity (i.e., the identi…cation is by triangular factorization). The recursive structure imposed
rin

on Ao 1 requires an ordering of the variables used in the estimation. Accordingly, we utilize

the ordering in zt = ( bt ; st ; pt )0 , where we also impose block exogeneity such that shocks
ep

on st or pt cannot have an impact on bt that is determined globally, whereas shocks on

bt can a¤ect both st and pt contemporaneously. Since the main objective of this paper
Pr

is to investigate the COVID-19 e¤ects on the S&P 500 Index, pt is ordered the last in this

framework.

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 The estimation is achieved by a Bayesian approach with independent normal-Wishart

ed
priors. This corresponds to generating posterior draws for the structural model parameters by

transforming each reduced-form posterior draw. In particular, for each draw of the covariance

iew
matrix from its posterior distribution, the corresponding posterior draw for Ao 1 is constructed

by using by triangular factorization so that the sizes of shocks are standardized to unity. In

the Bayesian framework, a total of 2,000 samples are drawn, where a burn-in sample of 1,000

ev
draws is discarded. The remaining 1,000 draws are used to determine the structural impulse

responses that are necessary for the estimation of COVID-19 e¤ects. While the median of

each distribution is considered as the Bayesian estimator, the 16th and 84th quantiles of

r
distributions are used to construct the 68% credible intervals (which is the standard measure

considered in the Bayesian literature).

er
pe
3 Estimation Results

The cumulative response of the S&P 500 Index pt to the U.S. COVID-19 cases ct is given
ot

in Table 1 for alternative horizons, whereas the corresponding continuous estimates are given

in Figure 3. As is evident, having 1% of an increase in cumulative daily COVID-19 cases in

tn

the U.S. results in about 0:01% of a cumulative reduction in the S&P 500 Index after one

day and about 0:03% of a reduction after one month. The latter result is in line with those
rin

in studies such as by Cao, Li, Liu, and Woo (2020) who have shown that the elasticity of

stock market indices with respect to cumulative con…rmed COVID-19 cases is about 0:028.

Regarding the patterns over time, these e¤ects converge to their long-run value in about two
ep

weeks according to Figure 3. It is important to emphasize that these results are robust to

the consideration of changes in the global economic activity as well as the term premium,
Pr

and they are signi…cant based on the 68% credible intervals.

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 The cumulative response of BDI to the U.S. COVID-19 cases is also given in Table 1,

ed
where having 1% of an increase in cumulative daily COVID-19 cases in the U.S. results in

about 0:01% of a cumulative reduction in BDI after one day and about 0:07% of a cumulative

iew
reduction after one month. These statistically signi…cant results (based on the 68% credible

intervals) are also supported by Figure 4 that represents the corresponding pattern over time.

Finally, the cumulative response of the spread between 10-year treasury constant maturity

ev
and the federal funds rate pt to the U.S. COVID-19 cases ct is also given in Table 1. It is

evident that COVID-19 e¤ects on the spread are very small, although they are statistically

signi…cant based on the 68% credible intervals; this result is also supported by Figure 5 that

r
represents the corresponding pattern over time.

er
The historical decomposition of the S&P 500 Index is given in Figure 6. As is evident,

the COVID-19 cases in the U.S. have been e¤ective on the S&P 500 Index mostly during
pe
March 2020, whereas BDI has been e¤ective on the S&P 500 Index starting from April 2020.

4 Conclusion
ot

The coronavirus pandemic 2019 (COVID-19) has resulted in turmoils not only in the global
tn

economic activity but also in …nancial markets around the world. Based on a structural

vector autoregression model employing daily data, this paper has investigated the e¤ects of
rin

COVID-19 cases in the U.S. on the S&P 500 Index. The results suggest that having 1%

of an increase in cumulative daily COVID-19 cases in the U.S. results in about 0:01% of a

cumulative reduction in the S&P 500 Index after one day and about 0:03% of a reduction
ep

after one month. Historical decomposition of the S&P 500 Index further suggests that the

negative e¤ects of COVID-19 cases in the U.S. on the S&P 500 Index have been mostly
Pr

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 observed during March 2020. These results are robust to the consideration of changes in the

ed
global economic activity as well as the term premium in the U.S.

iew
References

Baldwin, R., and B. W. di Mauro (2020): “Economics in the Time of COVID-19,”

CEPR Press VoxEU. org.

ev
Bildirici, M. E., F. Kay¬kç¬, and I. Ş. Onat (2015): “Baltic Dry Index as a major

economic policy indicator: the relationship with economic growth,” Procedia-Social and

r
Behavioral Sciences, 210, 416–424.

er ¼Źs adverse e¤ects on a

Cao, K. H., Q. Li, Y. Liu, and C.-K. Woo (2020): “Covid-19âA
pe
stock market index,”Applied Economics Letters, pp. 1–5.

Chen, N.-F., R. Roll, and S. A. Ross (1986): “Economic forces and the stock market,”

Journal of business, pp. 383–403.

ot

Fama, E. F. (1981): “Stock returns, real activity, in‡ation, and money,” The American
tn

economic review, 71(4), 545–565.

Fan, Y., and J.-H. Xu (2011): “What has driven oil prices since 2000? A structural change
rin

perspective,”Energy Economics, 33(6), 1082–1094.

Graham, M., J. Peltomäki, and V. Piljak (2016): “Global economic activity as an

ep

explicator of emerging market equity returns,” Research in International Business and

Finance, 36, 424–435.

Pr

Huang, R. D., and W. A. Kracaw (1984): “Stock market returns and real activity: a

note,”The Journal of Finance, 39(1), 267–273.

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 Isserlis, L. (1938): “Tramp shipping cargoes, and freights,”Journal of the Royal Statistical

ed
Society, 101(1), 53–146.

Kilian, L. (2009): “Not all oil price shocks are alike: Disentangling demand and supply

iew
shocks in the crude oil market,”American Economic Review, 99(3), 1053–69.

Klovland, J. T. (2002): “Business cycles, commodity prices and shipping freight rates:

Some evidence from the pre-WWI period,”SNF REPORT NO 48/02.

ev
Makridakis, S., A. Merikas, A. Merika, M. G. Tsionas, and M. Izzeldin (2020):

r
“A novel forecasting model for the Baltic dry index utilizing optimal squeezing,” Journal

of Forecasting, 39(1), 56–68.

er
Petkova, R. (2006): “Do the Fama–French factors proxy for innovations in predictive
pe
variables?,”The Journal of Finance, 61(2), 581–612.

Qiu, C., G. Colson, C. Escalante, and M. Wetzstein (2012): “Considering macro-

economic indicators in the food before fuel nexus,”Energy Economics, 34(6), 2021–2028.
ot

Stopford, M. (2008): Maritime economics 3e. Routledge.

tn

Tinbergen, J. (1959): “Tonnage and freight,”Jan Tinbergen Selected Papers, pp. 93–111.

Vassalou, M. (2003): “News related to future GDP growth as a risk factor in equity
rin

returns,”Journal of …nancial economics, 68(1), 47–73.

Yilmazkuday, H. (2020): “Coronavirus Disease 2019 and the Global Economy,”Available

ep

at SSRN: https://ssrn.com/abstract=3554381.
Pr

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 ed
Table 1 - COVID-19 E¤ects on the S&P 500 Index

iew
After 1 Day After 1 Week After 1 Month

COVID-19 E¤ects on the 0:014 0:035 0:029

S&P 500 Index (%) [ 0:020; 0:008] [ 0:047; 0:021] [ 0:042; 0:014]

ev
COVID-19 E¤ects on the 0:010 0:045 0:073

r
Baltic Exchange Dry Index (%) [ 0:019; 0:002] [ 0:081; 0:009] [ 0:142; 0:016]

COVID-19 E¤ects on
er
0:000 0:001 0:001
pe
the Spread (%) [0:000; 0:001] [0:000; 0:002] [0:000; 0:002]

Notes: The estimates represent the median across 1,000 draws. Lower and upper bounds in brackets
ot

represent the 68% credible intervals.

tn
rin
ep
Pr

10

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 ed
Figure 1 - Descriptive Statistics

COVID-19 Cases versus BDI

iew
200 60
Weekly COVID-19 Changes (%)

COVID-19

Weekly BDI Changes (%)

150 BDI 40

100 20

50 0

ev
0 -20

-50 -40
01-Feb-2020 01-Mar-2020 01-Apr-2020 01-May-2020 01-Jun-2020 01-Jul-2020 01-Aug-2020

r
COVID-19 Cases versus Spread
200 1.5
Weekly COVID-19 Changes (%)

Weekly Spread Changes (%)

COVID-19
150

100

50
er Spread
1

0.5
pe
0
0

-50 -0.5
01-Feb-2020 01-Mar-2020 01-Apr-2020 01-May-2020 01-Jun-2020 01-Jul-2020 01-Aug-2020
ot

COVID-19 Cases versus S&P 500

200 20
Weekly COVID-19 Changes (%)

Weekly S&P 500 Changes (%)

COVID-19
150 S&P 500
10
tn

100
0
50

-10
0
rin

-50 -20
01-Feb-2020 01-Mar-2020 01-Apr-2020 01-May-2020 01-Jun-2020 01-Jul-2020 01-Aug-2020

Notes: Series represent those used in the estimation.

ep
Pr

11

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 Figure 2 - Lag Selection

ed
1660

iew
1640

1620

ev
Deviance Information Criterion

1600

r
1580
er
pe
1560

1540
ot

1520
1 2 3 4 5 6 7 8 9 10 11 12 13 14
tn

Lags

Notes: The number of lags is selected based on the Deviance Information Criterion.
rin
ep
Pr

12

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 ed
Figure 3 - E¤ects of COVID-19 on the S&P 500 Index

iew
0

-0.005

ev
-0.01
Cumulative Impulse Response (%)

-0.015

r
-0.02

-0.025
er
pe
-0.03

-0.035

-0.04
ot

-0.045
tn

-0.05
0 5 10 15 20 25 30
Days
rin

Notes: The solid lines represent the estimates, while dashed lines represent lower and upper

bounds that correspond to the 68% credible intervals.

ep
Pr

13

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 ed
Figure 4 - E¤ects of COVID-19 on Baltic Exchange Dry Index

iew
0

ev
Cumulative Impulse Response (%)

-0.05

r
er
pe
-0.1
ot
tn

-0.15
0 5 10 15 20 25 30
Days
rin

Notes: The solid lines represent the estimates, while dashed lines represent lower and upper

bounds that correspond to the 68% credible intervals.

ep
Pr

14

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 ed
Figure 5 - E¤ects of COVID-19 on the Spread

iew
10-4
20

18

ev
16
Cumulative Impulse Response (%)

14

r
12

10 er
pe
8

6
ot

2
tn

0
0 5 10 15 20 25 30
Days
rin

Notes: The solid lines represent the estimates, while dashed lines represent lower and upper

bounds that correspond to the 68% credible intervals.

ep
Pr

15

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433
 ed
Figure 6 - Historical Decomposition of the S&P 500 Index

iew
Contribution of COVID-19 Contribution of BDI
4 4

3
2
2
S&P 500 Changes (%)

S&P 500 Changes (%)

0 1

ev
0
-2
-1

-4 -2

r
-3
-6
-4

-8
01-M ar-2020 01-M ay-2020 01-Jul-2020
er -5
01-M ar-2020 01-M ay-2020 01-Jul-2020
pe
Contribution of Spre ad Contribution of S&P 500
6 20

15
4
10
S&P 500 Changes (%)

S&P 500 Changes (%)

2
ot

0 0

-5
tn

-2
-10
-4
-15

-6 -20
rin

01-M ar-2020 01-M ay-2020 01-Jul-2020 01-M ar-2020 01-M ay-2020 01-Jul-2020

Notes: The solid lines represent the estimates, while dashed lines represent lower and upper

bounds that correspond to the 68% credible intervals.

ep
Pr

16

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3555433