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RBF
13,1
40
Received 31 August 2020
Revised 24 November 2020
Accepted 27 January 2021
Review of Behavioral Finance
Vol. 13 No. 1, 2021
pp. 40-50
© Emerald Publishing Limited
1940-5979
DOI 10.1108/RBF-08-2020-0215
COVID-19 fear index: does it
matter for stock market returns?
Sowmya Subramaniam and Madhumita Chakraborty
Finance and Accounting, Indian Institute of Management Lucknow, Lucknow, India
Abstract
Purpose – The purpose of this paper is to capture the investors’ mood related to the COVID-19 pandemic and
analyze its impact on the stock market returns.
Design/methodology/approach – To capture the investor mood related to the COVID-19 pandemic, the
authors construct a unique COVID-19 fear index based on the Search Volume Index (SVI) from Google Trends
(http://www.Google.com/trends/) of the search terms related to COVID-19 words and phrases as revealed by
Google and Internet dictionaries. The COVID-19 fear index was used to investigate its impact on the stock
market returns.
Findings – The study finds a strong negative association between COVID-19 fear and stock returns. Unlike
other studies, the relationship is persistent for a significant period. This relationship is not found to reverse
in the following days. The results also highlight that COVID-19 fear strongly impacts the stock market. The
sentiment persists for a significant period and is not reversed soon, unlike the regular times in earlier
studies.
Originality/value – The study is among the very few studies that constructed COVID-19 fear index using
several Google search terms and captured its impact on the stock market returns.
Keywords Investor attention, Covid-19 fear, Stock market returns
Paper type Research paper
1. Introduction
Moods and emotions felt today have an impact on people’s choices and decisions with respect
to the risk (Mann, 1992). People in a good mood are more optimistic in their choices and
judgments than those in a bad mood. These affective states have an impact on asset pricing
[1]. Several researchers have documented various exogenous factors to capture the mood and
are correlated with the stock returns. Saunders (1993) and Hirshleifer and Shumway (2003)
examined using the weather, Kamstra et al. (2003) analyzed using the daylight, Yuan et al.
(2006) investigated using the lunar phases, Edmans et al. (2007) studied using international
soccer results, Drakos (2010) investigated the terrorism activity and Fernandez-Perez et al.
(2020) used music to name a few. In this study, we examine how a retail investor’s mood on the
COVID-19 pandemic affects the stock market.
The current COVID-19 outbreak started in Wuhan in December 2019 and spread
rapidly across the continents. World Health Organization declared the COVID-19 epidemic
as a global pandemic on 11th March 2020. Since then, the transmission of corona infections
has increased exponentially. As of 30th August 2020, the number of people infected was
5.97 million, with 183 thousand fatalities in the United States of America alone. The
increasing number of infections led the government to take various precautionary
measures to flatten the curve. The measures include sealing the borders, cancellation of
international fights, ban of large gatherings, closure of educational institutions,
entertainment avenues, gyms, restaurants, bars, etc. The outbreak of COVID-19 created
a fear of health and survival issues caused by the virus. The fear of job losses and
uncertainty during times of economic troubles has put the investors in a negative
mental frame.
The authors are thankful to the Editor and the anonymous reviewers for their valuable comments and
suggestions for improvement.
 This study captures the sentiment induced by the COVID-19 pandemic and its impact on COVID-19 fear
the stock returns. We construct a unique COVID-19 fear index based on the Search Volume index
Index (SVI) from Google Trends (http://www.google.com/trends/) of the search terms related
to COVID-19 words and phrases as revealed by Google and Internet dictionaries.
We construct the COVID-19 fear index from March 2020 to August 2020. To analyze the
impact of COVID-19 fear on stock returns, the following stock market returns were
considered: S&P 500 index, Russell 1000 ETF, Nasdaq 100 ETF and S&P 500 ETF. The study
finds a strong negative association between COVID-19 fear and stock returns. Unlike other 41
studies, the relationship is persistent for a significant period. This relationship does not
reverse in the following days up to the next five days. Thus, in a nutshell, the results
demonstrate the effect of sentiment during the global pandemic period and report that the
impact of sentiment persists for a significant period and is not reversed soon, unlike the
earlier studies during normal times.
Further, we extend the analysis to other COVID-19 affected countries such as India and
Brazil to understand whether similar effects are present there too. The choice of countries is
based on the rank of COVID-19 affected countries. The results of the study found a negative
relationship between the COVID-19 fear index and their stock returns.
The study contributes to the literature in the following ways. First, it constructs a
unique COVID-19 sentiment using the daily search items related to COVID-19. The idea
of this paper is similar to the construction of the FEARS (Financial and Economic
Attitude Revealed through Search) index proposed by Da et al. (2015), but this study
focuses on the investor attention toward the COVID-19 pandemic. We construct the
COVID-19 sentiment using the search words related to COVID-19 to capture investors’
attention related to the virus. Da et al. (2015) construct the fears index based on the
financial and economic terms.
Second, this study considers COVID-19 sentiment as a mood proxy, as it satisfies the
criteria mentioned by Edmans et al. (2007). The COVID-19 sentiment drives the mood in a
significant manner, and the effect is strong in the asset prices. It affects the mood of a large
population, thereby influencing the investors, and it is correlated across the majority of
individuals throughout the world.
Finally, the study extends the work of Salisu and Akanni (2020). They constructed a
global fear index during the COVID-19 pandemic times using the number of reported cases
and deaths. Our study extends their work by capturing the investor mood during the
pandemic times using the Google search volume index.
The remainder of the paper is organized as follows. Section 2 reviews the literature
pertaining to the COVID-19 pandemic. Section 3 describes the data and methodology used
to construct the COVID-19 fear. Section 4 presents the empirical results and Section 5
concludes.

2. Literature review
The behavioral biases and their impact on asset prices have witnessed a burgeoning research.
Several proxies have been documented to capture the mood or sentiment of investors. These
are correlated with stock returns and as Rick and Lowenstein (2008) suggest, these emotions
have an influence on risky decision making. Some studies also show that extreme and
prolonged stress can adversely affect cognitive skills (Sapolsky, 1996). In an efficient market,
such changes in mood or cognitive abilities are not supposed to have any additional influence
on the stock returns after controlling for all the fundamental variables. Arbitrage operations
will ensure that prices are affected only by the fundamentals. However, the alternate
hypothesis of the influence of mood opens the door for behavioral finance. Due to limits to
arbitrage, there can be the severe impact of behavioral biases on asset prices, and mispricing
RBF can be persistent as informed investors are not in a position to drive the prices toward
13,1 fundamentals (Shleifer and Vishny (1997), Gromb and Vayanos (2002), Brunnermeier and
Pedersen (2009)
In this study, we try to explore if there is any link between the COVID-19 sentiment
and returns in the stock market. Following the literature on psychology, we assume
that anxiety can give rise to a sense of uncertainty (Smith and Ellsworth, 1985; Ortony
et al., 1988). The fear of job losses and uncertainty during times of economic troubles
42 can put the investors in a negative mental frame. The study specifically tests whether
psychological anxiety pertaining to COVID-19 has any relation to the stock market
even after controlling for the fundamental factors that influence the economy and the
market
The papers relating to the COVID-19 pandemic and its impact on the stock market are
growing in the literature (Salisu and Vo, 2020; Topcu and Gulal, 2020; Akhtaruzzaman et al.,
2021; to name a few). Narayan et al. (2021) examined the effect of government policies to
counter the repercussion of COVID-19 and its impact on the stock market of G7 economies.
They found that government policies were effective and the lockdown resulted in a
cushioning effect. They also found that government policies have a positive impact on stock
returns. Rizwan et al. (2020) estimated the systemic risk in eight of the COVID-19 affected
countries. They found a sharp increase in the systemic risk during pandemic times. Zhang
et al. (2020) found that the greater uncertainty of pandemic is associated with the higher
volatility in the markets and are unpredictable.
The literature in capturing the COVID-19 fear and investor behavior are very few.
Ortmann et al. (2020) used transactional level brokerage data of retail investors to
analyze the investor behavior during COVID-19 times. Their study found that investors
reduced the usage of leverage and increased their weekly trading intensity during
COVID-19 times. Haroon and Rizvi (2020) investigated the sentiment estimated from the
COVID-19 related news and analyzed its impact on stock markets’ volatility. They
found that panic generated news is associated with the increased volatility in the equity
markets. Recently, Salisu and Akanni (2020) constructed a global fear index for the
COVID-19. They used the reported cases and reported the death index to construct the
fear index. They found that the fear index is a good predictor of stock return in OECD
countries. Our study extends the work of Salisu and Akanni (2020) by measuring the
fear index using the Google search volume index. The construction of the fear index
using Google search volume index is helpful to measure the investor attention and the
fear caused by COVID-19.

3. Data and methodology

The COVID-19 fear index is constructed using the search items from the Google trends
described below in subsection 2.1. To capture the effect of fear caused by the corona
pandemic on the stock market returns, the S&P 500 index, Russell 1000 ETF, Nasdaq 100
ETF and S&P 500 ETF is considered. The daily closing prices of the index were obtained
from Thomson Reuters maintained by Refinitiv for the period March 2020–August 2020.
The CBOE VIX measure, which is also known as investor fear gauge, is considered as an
alternative to market sentiment measure (Baker and Wurgler, 2007), ADS [2] (Aruoba
et al., 2009) business condition index is used to control for macroeconomic activities,
economic policy uncertainty [3] measure to control the uncertainty related to policy
measures and the change in the number of new COVID-19 cases were used as control
variables.
Further, we extend our analysis to the other COVID-19 affected countries. For this
purpose, we choose India and Brazil as they were second and third, respectively, in the
list of worst affected countries (refer: https://www.worldometers.info/coronavirus/ COVID-19 fear
countries-where-coronavirus-has-spread/). The daily closing prices of stock indices of index
India (Nifty 500) and Brazil (Ibovespa) were obtained from Thomson Reuters for the
same period. The daily frequency of CBOE VIX, Call money rate, Dividend yield,
changes in FII and the change in the number of COVID-19 new cases were used as the
control variables [4].
43
3.1 Construction of COVID-19 fear index
The COVID-19 fear index is constructed using the search terms related to the corona
pandemic. We considered the search terms such as “COVID-19”, “Pandemic,” “CORONA
Virus,” “Mask,” “Social Distancing,” “COVID-19 symptoms,” etc. Further, we also took the
words commonly searched phrases and words displayed by the Google trends related to the
COVID-19 pandemic. This resulted in 80 search items.
The search volume index of the 80 terms is obtained at the daily frequency from March
2020 to August 2020 from Google Trends [5]. The daily log change in the search term is
estimated as

ΔGSVIi; t ¼ lnðGSVIi; t Þ  lnðGSVIi; t−1 Þ (1)

where GSVI is Google search volume index. The principal component analysis was
performed to construct the COVID-19 fear index. The first principal component was extracted
and used as COVID-19 fear index. The list of the search terms is provided in Table A1.
Figure 1 plots the daily index and the changes in the number of new cases. The plots are
directionally similar.
The relationship between COVID-19 fear index and the stock market returns are estimated
using the following model
X
returnt ¼ β0 þ β1 COVID  19 Feart þ τn Controli;n t þ εt (2)
n

where returnt denotes the return on day t. The five-day cumulative returns are also
considered (tþ1: tþ5) to investigate the impact of cumulative returns. The set of control
variables used in the model are lag asset returns till five lags; change is volatility Index (VIX),
changes in ADS business condition index, changes in economic policy uncertainty index and

45 20

40
15
35

30 10

25
5
20

15 0

10
–5 Figure 1.
5 Time series plot of
0 –10 COVIDs-19 fear index
3/2/2020 4/2/2020 5/2/2020 6/2/2020 7/2/2020 8/2/2020 and new COVID-19
infections
new cases per million COVID Fear Index
RBF the change in the number of new cases. To control for seasonality, we considered weekday
13,1 dummies in the regressions. Equation (2) is estimated using OLS regression with
bootstrapped standard errors.

4. Empirical findings
Table 1 reports the estimation results of the impact of COVID-19 fear on the aggregate market
44 returns (S&P 500 returns). The coefficient of COVID-19 fear is found to be negative and
significant after controlling for lagged returns and contemporaneous VIX, EPU, ADS and the
change in the number of COVID-19 new cases. An increase in COVID-19 fear has a negative
relationship with S&P returns. However, unlike Da et al., 2015, the day zero effect does not
seem to reverse, and there exists a persistent negative impact in the following days. These
results are revealing and are in line with the behavioral school, which suggests that over
pessimism of investors can have a persistent impact and affect stock prices for significant
periods of time. (Zouaoui et al., 2011).
We also examine the impact of COVID-19 sentiment on the highly liquid exchange-traded
funds. For this purpose, we consider three high liquid ETFs, namely, Russell 1000 ETF,
Nasdaq 100 ETF and S&P 500 ETF. The results reported in Table 2 are similar to the S&P
500 aggregate market index.
In an extension of the geographical context, we examine whether the COVID-19 fear index
has an impact on the stock returns in two other countries, namely, India and Brazil, which
were the second and third in the list of most affected countries. The results in panel A of
Table 3 show that the COVID-19 fear sentiment has a negative impact on the Nifty 500 return.
The coefficients of the fear on day t, tþ1, and tþ5 are significantly negative. The cumulative
returns up to five days are significantly negative, suggesting the persistence of the negative
effect.
Panel B of Table 3 shows that in Brazil’s case, an increase in COVID-19 fear has a
significantly negative impact on the IboVespa returns on day tþ2 and cumulatively up
to day tþ5. The results of both India and Brazil are qualitatively similar to that of the
US and provides evidence of the negative market reaction caused by the
pandemic fear.

5. Conclusion
The study investigates the impact of COVID-19 fear on stock returns. We construct a unique
COVID-19 fear index based on the Search Volume Index (SVI) from Google Trends (http://
www.google.com/trends/) of the search terms related to COVID-19 words and phrases as
revealed by Google and several Internet dictionaries. This COVID-19 fear index is used as a
proxy to measure the retail investor’s mood during this pandemic time. To analyze the impact
of COVID-19 fear on stock returns, the following stock market returns were considered – S&P
500 index, Russell 1000 ETF, Nasdaq 100 ETF and S&P 500 ET. The results suggest a
negative impact of COVID-19 fear on the stock returns, which seems to persist cumulatively
even up to five days. Further, we investigate whether the fear of COVID-19 influences the
other markets as well. For this, the analysis is done on two other countries, viz – India and
Brazil, which ranked second and third in the list of most affected countries. The results are
found to be similar to that of the US and provide evidence of a negative impact on the stock
returns.
This relationship has a persistent effect on stock prices for a significant period of time. The
findings may be useful for portfolio managers, as the COVID-19 fear index seems to be a good
predictor of stock prices during pandemic times.
 (1) (2) (3) (4) (5) (6) (7) (8)
Ret(t) Ret(tþ1) Ret(tþ2) Ret(tþ1: tþ2) Ret(tþ3) Ret(tþ4) Ret(tþ5) Ret(tþ1: tþ5)

COVID-19 0.002*** (0.001) 0.001 (0.000) 0.003*** (0.000) 0.004** (0.002) 0.003*** (0.000) 0.002* (0.000) 0.003*** (0.000) 0.010*** (0.003)
fear
ADS 0.001 (0.012) 0.018 (0.017) 0.011 (0.016) 0.008 (0.017) 0.004 (0.016) 0.009 (0.015) 0.004 (0.015) 0.002 (0.023)
EPU 0.004 (0.006) 0.020** (0.008) 0.017** (0.008) 0.006 (0.010) 0.012 (0.008) 0.013* (0.007) 0.010 (0.007) 0.016 (0.013)
VIX 0.183*** (0.020) 0.004 (0.035) 0.003 (0.030) 0.007 (0.065) 0.075** (0.003) 0.0306 (0.033) 0.013 (0.032) 0.105 (0.083)
Change in the 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000)
number of
COVID-19
new cases
Returns (t) 0.395*** (0.123) 0.136 (0.118) 0.235 (0.294) 0.328*** (0.122) 0.352*** (0.115) 0.002 (0.110) 0.880** (0.373)
Returns(t1) 0.135 (0.066) 0.133 (0.091) 0.0432 (0.08) 0.175 (0.204) 0.189** (0.090) 0.042** (0.086) 0.237*** (0.082) 0.205 (0.266)
Returns(t2) 0.143 (0.064) 0.114 (0.087) 0.199** (0.088) 0.083 (0.200) 0.050 (0.086) 0.1050 (0.082) 0.134* (0.077) 0.000 (0.255)
Returns(t-3) 0.048 (0.062) 0.089 (0.086) 0.058 (0.081) 0.135 (0.145) 0.179** (0.084) 0.182** (0.079) 0.070 (0.076) 0.185 (0.223)
Returns(t4) 0.130** (0.062) 0.021 (0.086) 0.166** (0.083) 0.181 (0.174) 0.217** (0.084) 0.131 (0.082) 0.099 (0.076) 0.0144 (0.211)
Returns(t5) 0.090 (0.059) 0.212** (0.081) 0.343*** (0.077) 0.125 (0.201) 0.1321* (0.084) 0.208*** (0.076) 0.0810 (0.071) 0.115 (0.224)
Constant 0.009 (0.004) 0.005 (0.005) 0.003 (0.005) 0.003 (0.006) 0.002 (0.005) 0.0042 (0.005) 0.005 (0.005) 0.007 (0.009)
Observations 123 123 123 123 123 123 123 123
Adjusted R2 0.64 0.28 0.33 0.23 0.37 0.36 0.36 0.36
Note(s): This table presents the regression results of S&P 500 returns to COVID-19 fear. The dependent variables are contemporaneous returns (Column 1), and future
S&P returns up to five days (Columns (2), (3), (5), (6), (7)) and cumulative returns up to 2days (column (4)) and 5days (column (8)). The control variables include lagged
returns and changes in ADS, EPU, VIX, change in the COVID-19 new cases and weekday dummies. The bootstrapped standard errors are reported in parenthesis. ***, **
and * denotes 1, 5 and 10% significance level
45
COVID-19 fear
index

COVID-19 Fear and

S&P 500 returns
Table 1.
 46
13,1
RBF

Table 2.

asset classes
COVID-19 fear and
returns to the other
(1) (2) (3) (4) (5)
Ret(t) Ret(tþ1) Ret(tþ2) Ret(tþ5) Ret (tþ1 : tþ5)

Panel A: COVID-19 fear and Russell 1000 ETF returns

COVID-19 fear 0.0023*** (0.000) 0.001 (0.000) 0.0032*** (0.001) 0.003*** (0.001) 0.007*** (0.002)
Controls Yes Yes Yes Yes Yes
Adjusted R2 0.68 0.26 0.32 0.28 0.26
Observations 123 123 123 123 123
Panel B: COVID-19 fear and NASDAQ ETF returns
COVID-19 fear 0.002*** (0.001) 0.001 (0.001) 0.003** (0.001) 0.002** (0.001) 0.007*** (0.001)
Controls Yes Yes Yes Yes Yes
Adjusted R2 0.64 0.31 0.23 0.26 0.34
Observations 123 123 123 123 123
Panel C: COVID-19 fear and S&P 500 ETF
COVID-19 Fear 0.002*** (0.001) 0.001 (0.001) 0.003*** (0.001) 0.003*** (0.001) 0.008*** (0.002)
Controls Yes Yes Yes Yes Yes
Adjusted R2 0.64 0.28 0.33 0.30 0.33
Observations 123 123 123 123 123
Note(s): This table presents the regression results of Russell 1000 ETF returns (Panel A), Nasdaq 100 ETF returns (Panel B) and S&P 500 ETF (Panel C) to COVID-19 fear.
The dependent variables are contemporaneous returns (Column 1), and future S&P returns up to five days (Columns (2), (3) and (5)) and cumulative returns up to 5 days
(column (5)). The control variables include lagged returns and changes in ADS, EPU and VIX. The bootstrapped standard errors are reported in parenthesis. ***, ** and *
denotes 1, 5 and 10% significance level
 (1) (2) (3) (4) (5)
Ret(t) Ret(tþ1) Ret(tþ2) Ret(tþ5) Ret (tþ1: tþ5)

Panel A: COVID-19 fear and India nifty 500 returns

COVID-19 fear 0.00056** (0.000) 0.00128 (0.000) 0.00203** (0.000) 0.003*** (0.000) 0.009*** (0.001)
Controls Yes Yes Yes Yes Yes
Adjusted R2 0.92 0.30 0.27 0.28 0.26
Observations 123 123 123 123 123
Panel B: COVID-19 fear and Brazil Ibovespa index
COVID-19 Fear 0.001 (0.112) 0.0006 (0.002) 0.0037*** (0.001) 0.00142 (0.001) 0.0069*** (0.002)
Controls Yes Yes Yes Yes Yes
Adjusted R2 0.85 0.13 0.10 0.05 0.37
Observations 123 123 123 123 123
Note(s): This table presents the regression results of India’s nifty 500 Returns (Panel A) and Brazil Ibovespa Index returns (Panel B) to COVID-19 fear. The dependent
variables are contemporaneous returns (Column 1), and the future index returns up to five days (Columns (2), (3) and (5)) and cumulative returns up to 5days (column (5)).
The daily frequency of CBOE VIX, Call money rate, Dividend yield, changes in FII and the change in the number of COVID-19 new cases were used as the control variables.
The bootstrapped standard errors are reported in parenthesis. ***, ** and * denotes 1, 5 and 10% significance level
47
COVID-19 fear
index

COVID-19 fear and

stock returns of other
Table 3.

economies
RBF ORCID iDs
13,1 Madhumita Chakraborty http://orcid.org/0000-0001-8368-6789

Notes
1. For extensive literature, refer to Hirshleifer, 2001.
48 2. The data is available at https://www.philadelphiafed.org/research-and-data/real-time-center/
business-conditions-index
3. The data is available at https://www.policyuncertainty.com/
4. As the ADS business condition index and Economic policy uncertainty data was not available for
India and Brazil at a daily frequency
5. The search queries on most of these terms were negligible before March 2020. After the first
reported death in the US on 29th February 2020, the COVID-19-related search queries gained
momentum.

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Further reading
Baker, M. and Wurgler, J. (2006), “Investor sentiment and the cross-section of stock returns”, The
Journal of Finance, Vol. 61, pp. 1645-1680.
RBF Appendix
13,1

COVID Work from home

Corona Remdesevir
Coronavirus Herd immunity
50 Virus Forehead thermometer
COVID-19 Fatality rate
Pandemic Ards
Quarantine Acute respiratory distress syndrome
Pneumonia Crisis
Who Recession
Social distancing COVID breakout
Lockdown COVID symptoms
Disease outbreak Fever
Fomite Shortness of breath
Community spread Loss of taste
Contact tracing Loss of smell
Mortality Unemployment
Morbidity Shutdown
Mortality rate Hand wash
Contagious Hand sanitizer
Infectious Face mask
Flatten the curve Can you get corona more than once
Respirator Is corona virus getting better
Ventilator What are the symptoms of corona virus
Flu How is corona virus transmitted
Spanish flu COVID death
Sars What percentage of people die from corona virus
Mers Sore throat
Asymptomatic How long after corona virus are you contagious
Vaccine How long does it take to get results from the corona virus test
Clinical trial Can you get corona virus more than once
Containment area What are the symptoms of corona virus
Hydroxycholoroquine Corona virus airborne
Incubation period Early signs of corona virus
Novel coronavirus Economic chaos
Table A1. Physical distancing Economic uncertainty
List of search words Social distancing Antibodies
and trending Person to person transmission Plasma therapy
Coronavirus questions Ppe kit Respiratory droplets
(provided by Google Screening Communicable disease
trends) Wfh Viral load

Corresponding author
Sowmya Subramaniam can be contacted at: sowmya@iiml.ac.in

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