Investor behaviour during COVID-19 crisis in Finnish stock market

Abstract

The COVID-19 crisis has been an unprecedented event, with an unprecedented impact on economies around the world, financial markets internationally and investor sentiment glob- ally. The crisis is still surrounded by many unknowns. This thesis sought to investigate how the COVID-19 crisis affected investor behaviour in the Finnish stock market in order for in- vestors, decisionmakers and other stakeholders to better understand the influence and consequences of investor behaviour in time of such crisis on financial markets and beyond.

The thesis aims to answer the question by approaching the problem from macro-economic, statistical and behavioural perspectives. The timespan researched was demarcated as the first half of the year 2020, and as such, focuses on the first wave of COVID-19 crisis. The research was three part: First, a descriptive study was conducted on the macro-economic consequences of the crisis in Finland, to better understand how the economic shock af- fected the stock market. Second, a statistical analysis was performed on the OMX Helsinki 25 index development and trend indicator of output to observe causality between them to understand the shock’s possible effect. On OMX Helsinki 25 index, a further analysis for historical volatility was performed. Thirdly, a final descriptive study combining earlier re- sults, with a timeline of significant news entering the market and CBOE Volatility Index was performed, and then reflected on established theory on investor behaviour.

The results of the study were, in a corresponding order that: COVID-19 presented an un- precedented multi-faceted shock on Finnish economy, disturbing flow of income by both medical and economic consequences, and by affecting the expectations of both consum- ers and industries. These effects exhibited simultaneously characteristics of both supply and demand shock, with a measurable and clear negative shock observable on Finnish trend indicator of output. The economic shock did not however seem to extend to stock market. On the contrary, it seems that the stock market developments anticipated the eco- nomic consequences of the crisis, as implied by the unprecedented level of uncertainty, and the plummeting OMX Helsinki 25. This thesis argued that the unprecedented uncer- tainty on financial markets possibly amplified the investor reaction to news entering the market, by intensifying the effect of herding, and different cognitive and emotional biases, obstructing rational investment decision-making process.

In conclusion, the COVID-19 crisis did not affect investor behaviour through the economic shock mechanism. Rather, investors anticipated the possible economic consequences of the crisis, generating a global uncertainty shock that influenced financial markets world- wide, worsening investor sentiment and skyrocketing market volatility.