Explain the US Stock Market’s Evolution during the COVID-19 Pandemic: Using SVIX Index

Abstract

I exploit Martin’s (2016) proxy of the equity premium to examine the reasons behind the US stock market evolution during the COVID-19 pandemic. Based on Knox and Vissing-Jorgensen’s (2021) decomposition of unexpected stock returns, I present that changes in the short-term equity premium can explain 58%–65% of the stock market evolution. I further construct an index (CARS) to reveal households’ concerns about coronavirus using Google search as in Da et al. (2014). Results show that a standard deviation increase in CARS coincides with an increase of 7.05 basis points of contemporary change in the 1-month equity premium. My findings indicate that policymakers and investors should pay attention to aggregate market fears about the pandemic or other crisis events in the future. Additionally, the equity premium from 1996 to 2020 illustrates that the US stock market has different regimes during crisis and non-crisis periods, and the term structure of equity premium is procyclical.