COVID-19 health related news and sectoral stock returns sensitivity in South Africa

Abstract

The purpose of this study is to analyse the relevance of health news related to Covid-19 on South African sectorial stock returns. This is inspired by the global Covid-19 pandemic in predicting sectorial stock returns. This study examines the estimation of dynamic panel data using a dynamic common correlated effects estimator. It employs two pairwise forecast measures, specifically the Campbell & Thompson (2008) and Clark & West (2007) tests, to address the nested predictive models. Thus, this study begins by analysing the impact of health news relating to Covid-19 when control variables are not considered. This is following by when control variables are incorporated into the model. Lastly, the forecasting power of Models 3 and 4 is evaluated by comparing the two models with historical average or constant returns model (CR), for both with and without control variables. The findings of this study reveals that the model incorporating health news indexes outperforms the constant returns model. This proves that health news is a valuable indicator for predicting stock returns, particularly in the wake of the pandemic, underscoring the importance of monitoring health-related information for investment decisions. This study further finds that considering the "asymmetry" effect and incorporating adjustments for macroeconomic factors enhances the predictive accuracy of the health news-driven model. The outcomes remain consistently strong across both the periods of in-sample and out-of-sample forecasts, demonstrating resilience to outliers and variations. These results have practical significance for a range of stakeholders, encompassing academics, practitioners like rational investors, portfolio managers and policymakers. The practical implications extend to aspects such as managing portfolio risk, realizing diversification advantages and exploring opportunities for the creation of innovative investment instruments within financial markets.