The Impact of COVID-19 on Investors’ Behavior: Evidence from Risk-aversion, Herding Behavior, and Availability Bias

Research Article
Open access

The Impact of COVID-19 on Investors’ Behavior: Evidence from Risk-aversion, Herding Behavior, and Availability Bias

Zixuan He 1*
  • 1 University of California San Diego    
  • *corresponding author zih023@ucsd.edu
Published on 13 September 2023 | https://doi.org/10.54254/2754-1169/26/20230551
AEMPS Vol.26
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-915371-95-9
ISBN (Online): 978-1-915371-96-6

Abstract

The unforeseen pandemic has significantly influenced the financial market, and has caused major disruptions in the global economy, leading to a sharp decline in stock prices and increased volatility in financial markets. Assessing the impact of the COVID-19 pandemic on the market is essential for both investors and policymakers. This study recognizes that irrationality exists during the pandemic in investors’ decision-making and find that the efficient market hypothesis does not always hold perfectly. According to the analysis, emotional and cognitive biases play significant roles in investors’ decision-making, especially under uncertainty. Using empirical data from the previous study, the existence of risk aversion, herding behavior, and availability bias during the pandemic is testified. The results suggest that the pandemic has led to an increase in risk aversion among investors, as well as a tendency towards herding behavior in the stock market but not the crypto market. Furthermore, evidence of availability bias is found, with investors placing greater weight on recent news and information related to the pandemic, and making decisions based on that information. These findings have important implications for investment strategy and risk management during a crisis.

Keywords:

behavioral finance, risk-aversion, herding behavior, availability bias

He,Z. (2023). The Impact of COVID-19 on Investors’ Behavior: Evidence from Risk-aversion, Herding Behavior, and Availability Bias. Advances in Economics, Management and Political Sciences,26,93-101.
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References

[1]. Thorbecke, W.: The Impact of the COVID-19 Pandemic on the U.S. Economy: Evidence from the Stock Market. Journal of Risk and Financial Management 13(10), 233 (2020).

[2]. Albulescu, C. T.: COVID-19 and the United States financial markets’ volatility. Finance research letters, 38, 101699 (2021).

[3]. Wadhawan, A., Kulkarni, M. S.: Behavioral finance and COVID-19. Retrieved April 3, 2023, Retrieved from: https://www.proquest.com/docview/2734428770?pq-origsite=gscholar&fromopenview=true

[4]. Baker, S. R.: Covid-Induced Economic Uncertainty - National Bureau of Economic Research. 2020, Retrieved from: https://www.nber.org/system/files/working_papers/w26983/w26983.pdf.

[5]. Vasileiou, E.: Explaining stock markets' performance during the COVID‐19 crisis: Could Google searches be a significant behavioral indicator?. Intelligent Systems in Accounting, Finance and Management, 28(3), 173-181 (2021).

[6]. Tseng, K. C.: Behavioral finance, bounded rationality, neuro-finance, and traditional finance. Investment Management and Financial Innovations, 3(4), 7-18 (2006).

[7]. Bansal, T.: Behavioral finance and COVID-19: cognitive errors that determine the financial future. Available at SSRN 3595749 (2020).

[8]. Bavel, J. J. V., Baicker, K., Boggio, P. S., et al.: Using social and behavioural science to support COVID-19 pandemic response. Nature human behaviour, 4(5), 460-471 (2020).

[9]. Raut, R. K., Kumar, R.: Investment Decision-Making Process between Different Groups of Investors: A Study of Indian Stock Market. Asia-Pacific Journal of Management Research and Innovation, 14(1-2), 39–49 (2018).

[10]. Okorie, D. I., Lin, B.: Stock markets and the COVID-19 fractal contagion effects. Finance Research Letters, 38, 101640 (2021).

[11]. Huber, C., Huber, J., Kirchler, M.: Market shocks and professionals’ investment behavior–evidence from the covid-19 crash. Journal of Banking & Finance, 133, 106247 (2021).

[12]. Cohn, A., Engelmann, J., Fehr, E., Maréchal, M. A.: Evidence for Countercyclical Risk Aversion: An Experiment with Financial Professionals. The American Economic Review, 105(2), 860–885 (2015).

[13]. Zhang, D., Hu, M., Ji, Q.: Financial markets under the global pandemic of COVID-19. Finance research letters, 36, 101528 (2020).

[14]. Bouri, E., Demirer, R., Gupta, R., Nel, J.: COVID-19 pandemic and investor herding in international stock markets. Risks, 9(9), 168 (2021).

[15]. Yarovaya, L., Matkovskyy, R., Jalan, A.: The effects of a “black swan” event (COVID-19) on herding behavior in cryptocurrency markets. Journal of International Financial Markets, Institutions and Money, 75, 101321 (2021).

[16]. Groß-Klußmann, A., Hautsch, N.: When machines read the news: Using automated text analytics to quantify high frequency news-implied market reactions. Journal of Empirical Finance, 18(2), 321-340 (2011).

[17]. Hopkins, N., Reicher, S.: Mass gatherings, health, and well‐being: from risk mitigation to health promotion, Soc. Issues. Pol. Rev., 15 (1), 114-145 (2021).

[18]. Schmitt, N., Westerhoff, F.: Herding behaviour and volatility clustering in financial markets. Quantitative Finance, 17(8), 1187-1203 (2017).

[19]. Kizys, R., Tzouvanas, P., Donadelli, M.: From COVID-19 herd immunity to investor herding in international stock markets: The role of government and regulatory restrictions. International Review of Financial Analysis, 74, 101663 (2021).

[20]. Aharon, D. Y.: Uncertainty, fear and herding behavior: Evidence from size-ranked portfolios. Journal of Behavioral Finance, 22(3), 320-337 (2021).

[21]. Al-Awadhi, A. M., Alsaifi, K., Al-Awadhi, A., Alhammadi, S.: Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of behavioral and experimental finance, 27, 100326 (2020).

[22]. Economou, F., Hassapis, C., & Philippas, N.: Investors’ fear and herding in the stock market. Applied Economics, 50(34-35), 3654-3663 (2018).

[23]. Marty, T., Vanstone, B., & Hahn, T.: News media analytics in finance: a survey. Accounting & Finance, 60(2), 1385-1434 (2020).

[24]. Yuwono, W., Elmadiani, C.: The Effect of Emotional Contagion, Availability Bias, Overconfidence, Loss Aversion, and Herding on Investment Decisions in the Millennial Generation During the Beginning of the Covid-19 Pandemic. In Proceedings of the 1st International Conference on Law, Social Science, Economics, and Education, ICLSSEE 2021, March 6th 2021, Jakarta, Indonesia (2021, May).

[25]. Khan, S.: Impact of financial literacy, financial knowledge, moderating role of risk perception on investment decision. Financial Knowledge, Moderating Role of Risk Perception on Investment Decision (February 4, 2016).

[26]. Haroon, O., Rizvi, S. A. R.: COVID-19: Media coverage and financial markets behavior—A sectoral inquiry. Journal of Behavioral and Experimental Finance, 27, 100343 (2020).

Cite this article

He,Z. (2023). The Impact of COVID-19 on Investors’ Behavior: Evidence from Risk-aversion, Herding Behavior, and Availability Bias. Advances in Economics, Management and Political Sciences,26,93-101.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 2023 International Conference on Management Research and Economic Development

ISBN：978-1-915371-95-9(Print) / 978-1-915371-96-6(Online)
Editor：Javier Cifuentes-Faura, Canh Thien Dang
Conference website: https://2023.icmred.org/
Conference date: 28 April 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.26
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Thorbecke, W.: The Impact of the COVID-19 Pandemic on the U.S. Economy: Evidence from the Stock Market. Journal of Risk and Financial Management 13(10), 233 (2020).

[2]. Albulescu, C. T.: COVID-19 and the United States financial markets’ volatility. Finance research letters, 38, 101699 (2021).

[3]. Wadhawan, A., Kulkarni, M. S.: Behavioral finance and COVID-19. Retrieved April 3, 2023, Retrieved from: https://www.proquest.com/docview/2734428770?pq-origsite=gscholar&fromopenview=true

[4]. Baker, S. R.: Covid-Induced Economic Uncertainty - National Bureau of Economic Research. 2020, Retrieved from: https://www.nber.org/system/files/working_papers/w26983/w26983.pdf.

[5]. Vasileiou, E.: Explaining stock markets' performance during the COVID‐19 crisis: Could Google searches be a significant behavioral indicator?. Intelligent Systems in Accounting, Finance and Management, 28(3), 173-181 (2021).

[6]. Tseng, K. C.: Behavioral finance, bounded rationality, neuro-finance, and traditional finance. Investment Management and Financial Innovations, 3(4), 7-18 (2006).

[7]. Bansal, T.: Behavioral finance and COVID-19: cognitive errors that determine the financial future. Available at SSRN 3595749 (2020).

[8]. Bavel, J. J. V., Baicker, K., Boggio, P. S., et al.: Using social and behavioural science to support COVID-19 pandemic response. Nature human behaviour, 4(5), 460-471 (2020).

[9]. Raut, R. K., Kumar, R.: Investment Decision-Making Process between Different Groups of Investors: A Study of Indian Stock Market. Asia-Pacific Journal of Management Research and Innovation, 14(1-2), 39–49 (2018).

[10]. Okorie, D. I., Lin, B.: Stock markets and the COVID-19 fractal contagion effects. Finance Research Letters, 38, 101640 (2021).

[11]. Huber, C., Huber, J., Kirchler, M.: Market shocks and professionals’ investment behavior–evidence from the covid-19 crash. Journal of Banking & Finance, 133, 106247 (2021).

[12]. Cohn, A., Engelmann, J., Fehr, E., Maréchal, M. A.: Evidence for Countercyclical Risk Aversion: An Experiment with Financial Professionals. The American Economic Review, 105(2), 860–885 (2015).

[13]. Zhang, D., Hu, M., Ji, Q.: Financial markets under the global pandemic of COVID-19. Finance research letters, 36, 101528 (2020).

[14]. Bouri, E., Demirer, R., Gupta, R., Nel, J.: COVID-19 pandemic and investor herding in international stock markets. Risks, 9(9), 168 (2021).

[15]. Yarovaya, L., Matkovskyy, R., Jalan, A.: The effects of a “black swan” event (COVID-19) on herding behavior in cryptocurrency markets. Journal of International Financial Markets, Institutions and Money, 75, 101321 (2021).

[16]. Groß-Klußmann, A., Hautsch, N.: When machines read the news: Using automated text analytics to quantify high frequency news-implied market reactions. Journal of Empirical Finance, 18(2), 321-340 (2011).

[17]. Hopkins, N., Reicher, S.: Mass gatherings, health, and well‐being: from risk mitigation to health promotion, Soc. Issues. Pol. Rev., 15 (1), 114-145 (2021).

[18]. Schmitt, N., Westerhoff, F.: Herding behaviour and volatility clustering in financial markets. Quantitative Finance, 17(8), 1187-1203 (2017).

[19]. Kizys, R., Tzouvanas, P., Donadelli, M.: From COVID-19 herd immunity to investor herding in international stock markets: The role of government and regulatory restrictions. International Review of Financial Analysis, 74, 101663 (2021).

[20]. Aharon, D. Y.: Uncertainty, fear and herding behavior: Evidence from size-ranked portfolios. Journal of Behavioral Finance, 22(3), 320-337 (2021).

[21]. Al-Awadhi, A. M., Alsaifi, K., Al-Awadhi, A., Alhammadi, S.: Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of behavioral and experimental finance, 27, 100326 (2020).

[22]. Economou, F., Hassapis, C., & Philippas, N.: Investors’ fear and herding in the stock market. Applied Economics, 50(34-35), 3654-3663 (2018).

[23]. Marty, T., Vanstone, B., & Hahn, T.: News media analytics in finance: a survey. Accounting & Finance, 60(2), 1385-1434 (2020).

[24]. Yuwono, W., Elmadiani, C.: The Effect of Emotional Contagion, Availability Bias, Overconfidence, Loss Aversion, and Herding on Investment Decisions in the Millennial Generation During the Beginning of the Covid-19 Pandemic. In Proceedings of the 1st International Conference on Law, Social Science, Economics, and Education, ICLSSEE 2021, March 6th 2021, Jakarta, Indonesia (2021, May).

[25]. Khan, S.: Impact of financial literacy, financial knowledge, moderating role of risk perception on investment decision. Financial Knowledge, Moderating Role of Risk Perception on Investment Decision (February 4, 2016).

[26]. Haroon, O., Rizvi, S. A. R.: COVID-19: Media coverage and financial markets behavior—A sectoral inquiry. Journal of Behavioral and Experimental Finance, 27, 100343 (2020).

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