Fears for COVID-19: The crash risk of stock market

This paper investigates the impact of COVID-19 epidemic on the Chinese stock market crash risk. We first estimate conditional skewness of the return distribution from the GARCH-S model as the proxy of the equity market crash risk for the Shanghai Exchange Stock Market. Then, we construct a fear index for COVID-19 using the data from Baidu Index. Our findings show that the conditional skewness reacts negatively to daily growth in total confirmed cases, indicating that the epidemic increases the crash risk of stock market. Furthermore, we find that the fear sentiment also exacerbates the crash risk. In particular, the fear sentiment plays a significant role in the impact of COVID-19 on the crash risk. When the fear sentiment among people is high, the stock market crash risk is affected by the epidemic more seriously. Evidence from the daily deaths and global cases shows the robustness.