COVID-19 related uncertainty, investor sentiment and stock returns in India

Akin to the global markets, the Indian stock market also nosedived in response to the COVID-19 pandemic. However, this drastic fall was not persistent; rather a sharp recovery was witnessed as a result of sweeping investor enthusiasm and wide-ranging speculation. In this paper, we explore the relationship between investor sentiment, stock returns and important macro variables during the COVID-19 period spanning from January, 2020 to May, 2021. We have also conducted event analysis to see the significance of major events during the period. While the Great Lockdown and first fiscal package impacted the stock returns significantly, the first case reported, second fiscal package, vaccination drive and the second wave failed to create a commendable impact. The event analysis also suggests that the Indian stock market responds negatively to an increase in interest rate uncertainty. Our empirical analysis shows evidence of significant effect of investor sentiment on stock returns during all periods, except the period of extreme volatility. Moreover, the stock return is positively related to oil price and negatively related to the exchange rate. We also find mixed evidence of COVID-19 related information on stock market.