Modeling and analysis of the effect of COVID-19 on the stock price: V and L-shape recovery

09/28/2020
by   Ajit Mahata, et al.
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The emergence of the COVID-19 pandemic, a new and novel risk factors, leads to the stock price crash due to a rapid and synchronous sell-off by the investors. However, within a short period, the quality sectors start recovering from the bottom. A model of the stock price movement has been developed to explain such phenomena based on the Institutional fund flow and financial antifragility, which represents the financial indicator of a company. The assumes that during the crash, the stock does not depend on the financial antifragility of a company. We study the effects of shock lengths and antifragility parameter on the stock price during the crises period using the synthetic and real fund flow data. We observed that the possibility of recovery of a quality stock decreases with an increase in shock-length beyond a specific period. On the other hand, a quality stock with higher antifragility shows V-shape recovery and outperform others. The shock lengths and recovery length of quality stock are almost equal that is seen in the Indian market. Financially stressed stocks, i.e., the stock with negative antifragility, showed L-shape recovery during the pandemic. The results show that the investors, in the uncertainty like COVID-19, restructure their portfolio to de-risk the investment towards quality stocks. The study may help the investors to make the right investment decision during a crisis.

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