Stock Market Reactions of UK Banks During the COVID-19 Crisis

Table of Contents

1 Introduction

2 Hypothesis development

2.1 Literature review

2.1.1 Theoretical framework

2.1.1.1 Market reactions to news

2.1.1.2 Influence of major events on the stock market

2.1.2 Function of banks

2.1.3 The banking system in the UK

2.1.4 Previous studies on the effect of COVID-19 on financial markets

2.2 Global financial of crisis 2007 to 2009

2.2.1 Timeline and causes

2.2.2 Event study description

2.2.3 Event study results

2.3 Hypothesis formulation

3 Event study methodology

3.1 Definition

3.2 Timeline

3.3 Calculating returns

3.4 Measuring normal returns

3.4.1 Constant mean return model

3.4.2 Market model

3.4.3 Economic models

3.5 Abnormal returns

3.5.1 Calculation of abnormal returns with the market model

3.5.2 Calculation of cumulative and average returns

3.6 Significance test

3.7 Robustness checks

4 Event study data

4.1 Historical data

4.2 Event dates

5 Empirical results

5.1 Bad-news events

5.2 Good-news events

5.3 Hypothesis analysis

6 Conclusion

Research Objectives and Themes

This thesis examines the impact of COVID-19-related news on the stock market performance of banks in the United Kingdom. It aims to determine whether UK bank stock prices react more sensitively to both positive and negative news compared to the broader market, as represented by the FTSE 350 index, by applying an event study methodology.

• Analysis of stock market efficiency in the context of the COVID-19 pandemic.
• Investigation of the role of banks as financial intermediaries during economic crises.
• Evaluation of stock market reactions to specific bad-news events (e.g., pandemic declaration, national lockdown).
• Assessment of market responses to good-news events (e.g., reopening of non-essential retail).
• Comparative analysis of abnormal returns (AR) between individual banks and the market index.

Excerpt from the Book

Summary of Chapters

1 Introduction: Introduces the economic context of the COVID-19 pandemic and outlines the research question regarding the abnormal stock price reactions of UK banks.

2 Hypothesis development: Establishes the theoretical framework, reviews relevant literature on market efficiency and bank functions, and formulates specific hypotheses based on past financial crises.

3 Event study methodology: Details the quantitative approach used to calculate abnormal returns, including the market model and significance testing procedures.

4 Event study data: Describes the selection of the 11 UK banks and the FTSE 350 index, as well as the identification of specific event dates during the pandemic.

5 Empirical results: Presents the calculated abnormal returns for both bad-news and good-news events and analyzes whether the collected data supports the formulated hypotheses.

6 Conclusion: Summarizes the study's findings, acknowledges limitations regarding the short-term focus, and suggests avenues for future research on pandemic impacts in a globalized economy.

Key Words

Event study, COVID-19, UK banks, stock market, abnormal return, market efficiency, financial crisis, FTSE 350, bank stocks, quantitative easing, lockdown, banking sector, market model, statistical significance, hypothesis testing.

Frequently Asked Questions

What is the core focus of this thesis?

The thesis investigates how stock prices of UK banks react to significant news events during the COVID-19 pandemic compared to the overall market performance.

What are the primary themes addressed?

Key themes include stock market efficiency, the role of banks as financial intermediaries, the impact of pandemic-related events on financial markets, and quantitative event study analysis.

What is the central research question?

The research asks whether bank stock prices react more abnormally to good and bad news than the broader market (represented by the FTSE 350) and how this reaction manifests.

Which scientific methodology is applied?

The study utilizes an event study methodology, specifically the market model, using ordinary least squares (OLS) regression to estimate coefficients and t-tests to verify statistical significance.

What is covered in the main body of the work?

The main body covers the development of hypotheses, the methodology of event studies, the data selection process, and the empirical analysis of four specific events during the COVID-19 crisis.

What are the key terms that define this work?

This work is characterized by terms such as event study, abnormal return, stock market reaction, financial crisis, and COVID-19, reflecting its focus on financial economics.

How were the event dates selected for the study?

Event dates were categorized into good-news and bad-news events based on significant pandemic developments, ensuring they were public and allowed for the analysis of abnormal returns.

Does the study find that banks react differently than the market?

Yes, the study concludes that UK banks show a more sensitive reaction to news, particularly confirming that bad-news events lead to significant negative abnormal returns.