Did COVID-19 increase equity market risk exposure? Evidence from China, the UK, and the US

By studying equity market returns to China, the UK, and the US, we explore the key question of whether the COVID-19 pandemic changes the risk exposure of equity markets, which is fundamental to market stability and investor confidence. Using data from the World Health Organization and Bloomberg, our full sample covers the period 3 July 2019 to 15 December 2020 which facilities a subsample (Normal, Shock, Endurance) analysis. Utilizing Value-at-Risk (VaR) metrics as our risk exposure measure, we find that 1) There exists a sharp increase in equity market risk exposure across the three equity markets. 2) A stronger pandemic impact is found in different market capitalization segments – China, large-cap; the UK, small-cap; the US, mid-cap. 3) Generally, investors consider the number of new cases as a more worrying factor than deaths while UK investors are sensitive to both. Our observations suggest that given limited resources but rising demands from both businesses and households for government assistance, a one-size-fits-all policy to support market recovery would be sub-optimal.