Scientists Find Out What Affects Stock Markets the Most during Pandemic

10:56, February 11, 2022

Researchers call on authorities to be prudent and investors to exercise self-control

A team of researchers from Ural Federal University, Dresden Technical University and Ufa State Aviation Technical University found that not only the coronavirus pandemic had a negative impact on global stock markets, but also mass hysteria provoked by hype on the Internet and social networks. Scientists warn that due to the hype and hysteria in the social networks, the decline in stock indices in conditions of external shocks such as the COVID-19 pandemic may turn into a collapse. This is the first such study conducted in the world, described in the journal International Review of Economics & Finance.

"Science is well aware that in emergency situations people are likely to have severe mood swings and make decisions in a state in which emotional reactions prevail over rational ones. The ability to think and act rationally is also weakened when an individual, when caught in a crowd, becomes infected with the "hysterical disease," mass psychosis. These problems have long been developed by science within the framework of crowd psychology. Recently it has been found that the laws of crowd behavior are applicable to Internet communities as well. Our task was to find out to what extent the phenomenon of collective unconsciousness, hype and hysteria condition the behavior of stock market participants, whether it can influence market volatility and to what extent modern media can provoke such effects," explains Aleksandr Nepp, associate professor of the Ural Federal University Department of International Economics and Management.

For this purpose, scientists tracked the dynamics of stock market indices in the U.S., the U.K., Germany, France, Spain, Italy, and Japan (Russia was not included in the list of countries studied due to a lack of reliable statistical data). Then experts developed economic and mathematical models based on statistical data on the incidence of COVID-19, the number of reports about it in electronic and printed media, the number of relevant queries in the Google search engine and publications on social networks Facebook, Instagram and Twitter. The analysis covered the period from December 30, 2019, to April 30, 2020, when the first outbreak of the coronavirus and a spike in information about it were observed.

It turned out that from mid-February to mid-March, the COVID-19 illness provoked an outbreak of discussion of the pandemic in the digital and print media, an explosion of Internet searches on the topic and activity on social media.

On the basis of the developed economic-mathematical models the scientists, first, revealed the negative influence of social networks on the volatility of stock market indices. Secondly, they discovered the effect of hype and hysteria, which manifested itself in an explosive short-term increase in the impact of social networks on the volatility of stock indexes. Third, we found that the effect of the mass media and the discovered effect of hype and hysteria was comparable to, and sometimes exceeded, the effect of the pandemic itself.

"And the press, like Instagram, which is popular among young people, had the least impact on the stock markets. Most of the excitement was caused by a surge of queries on Google, discussions on Facebook and posts on Twitter. It can be argued that this time social networks played an important role in the promotion of hysteria and influenced the markets stronger than classical factors such as the price of oil and gold. At the same time, the hype effect was observed even before the peak of the pandemic, and after the short-term interest in the topic receded, it began to weaken and eventually disappeared," Aleksaner Nepp emphasizes.

Thus, the researchers concluded that during a pandemic, the media and social networks can infect the audience with panic, provoking mass hysteria, causing irrational behavior of stock market participants and, consequently, its increased volatility and fall.

"The positive side of the analyzed events is that, assessing the sad experience of the first victims of the pandemic and media hysteria, for example Italy, the most prudent national governments and regulators, like those in the USA, took measures in advance and promptly to support troubled industries and stabilize stock markets. At the same time, it is becoming clear that volatility can be caused not only by objective reasons such as a pandemic, but also by reactions to them in the media and social networks. Both authorities and investors need to be prepared for this. We recommend the former to conduct an effective information and explanatory counter-campaign, and the latter to remember that the detected effects, although significant, are short-lived," Aleksandr Nepp concludes.

Reference

This work was supported by the Russian Foundation for Basic Research (Project No. 20-04-60158).

The news article was translated by UrFU International Marketing Office
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