COVID-19 and Market Volatility: Understanding the Economic Impact of a Global Pandemic

An article co-authored by GSEM Professor Tony Berrada, along with Jerome Detemple and Marcel Rindisbacher, examines how COVID-19 and related health policies triggered unprecedented market volatility, particularly in the S&P 500.

Using an integrated economic and epidemiological model, the study shows that workforce disruptions and investor sentiment—amplified by containment measures—were key drivers of the volatility spike. The findings highlight a critical trade-off: measures that protect public health can intensify financial instability. While the model offers a robust explanation of short- and long-term dynamics, future research must incorporate monetary policy effects to fully capture market behavior.

ABSTRACT

We examine the impact of COVID-19 on market in an equilibrium framework. The model combines beliefs-dependent preferences for economic dynamics and a stochastic Susceptible-Exposed-Infectious-Recovered-Deceased (SEIRD) model with unpredictable birth/vaccine events and mitigating policies for disease propagation. The estimated model explains the realized trajectories of the S&P 500 volatility and number of new cases and identifies the source and composition of the volatility spike while providing a good match for 25 unconditional moments of economic series. Beliefs dependence, in conjunction with real effects due to the short-term decline of the effective workforce early in the pandemic, is critical for this comprehensive explanation of short- and long-run properties. A model comparison study is performed. Out-of-sample volatility prediction exercises document that the good in-sample model fit for volatility and cases is not due to over-parametrization. The effects of alternative mitigation policies such as changes in contamination rate, shelter-in-place duration, and shelter-in-place compliance rate are examined. They document the tradeoff in number of cases and stock volatility during the pandemic, and the dominant role of unemployment news volatility.

Access the study: Volatility During the COVID-19 Pandemic

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