Modeling and analysis of the effect of COVID-19 on the stock price: V and L-shape recovery

Abstract

The emergence of the COVID-19 pandemic, a new and novel risk factor, leads to the stock price crash due to the investors' rapid and synchronous sell-off. However, within a short period, the quality sectors start recovering from the bottom. A stock price model has been developed during such crises based on the net-fund-flow (${\Psi }_t$) due to institutional investors, and financial antifragility ($\varphi$) of a company. We assume that during the crash, the stock price fall is independent of the $\varphi$. We study the effects of shock lengths and $\varphi$ on the stock price during the crises period using the ${\Psi }_t$ obtained from synthetic and real fund flow data. We observed that the possibility of recovery of stock with $\varphi >0$, termed as quality stock, decreases with an increase in shock-length beyond a specific period. A quality stock with higher $\varphi$ shows V-shape recovery and outperform others. The shock length and recovery period of quality stock are almost equal that is seen in the Indian market. Financially stressed stocks, i.e., the stocks with $\varphi <0$, show L-shape recovery during the pandemic. The stock data and model analysis shows that the investors, in uncertainty like COVID-19, invest in quality stocks to restructure their portfolio to reduce the risk. The study may help the investors to make the right investment decision during a crisis.

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