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The COVID-19 vaccination programme and UK stock returns – a sectoral analysis

Abstract

The COVID-19 outbreak, declared as a pandemic and worldwide emergency on the 11th ofMarch 2020, has weakened the economy of the United Kingdom and has caused panic among investors. Discovering a vaccine that assuages its effects has promised to beamongst the most long-anticipatedmilestones in 2020.Fast forward eight months, the Pfizer-BioNTech COVID-19 vaccine was declared to havedemonstrated high efficacy against the disease in phase III clinical trials and they are now being utilised in national vaccination programmes.

Thus, given this new-found reality, this research seeks to appraise theinitial heterogenous reaction of UK-based sectors to the announcement of the COVID-19 vaccination programme. While this particular nexus has been explored before on a global basis with the literature only considering financial volatility as a gauge for stock market performance, this study is the first to employ an event study methodology. Utilising the FTSE-100 index, this study analyses data for twelve sectors to appraise whether there were any considerable differences in the performance of the sectors under different event windows.

In particular, thehomebuilding and construction industry reacted positively to the primeCOVID-19 vaccine announcement at a significant level on the event day. Nevertheless, the opposite can be said from the event windows following on insomuch as morale within the UK stock market restabilisedprogressively in the industriesmost severely affected by the prime announcement.

These industries include Banking Services, Software and IT Services, Metals and Mining, and Professional and Commercial Services. Overall, the findings gathered from this research serve great importance for many stock market stakeholders including investors,

1. Introduction

1.1 COVID-19 and vaccination rollouts: an overview

The COVID-19 pandemic is a contemporary, but constant problem throughout the globe.   When compared with the global financial crisis (GFC) of 2008, the earliest indication of COVID-19 arose on December 31, 2019, in Wuhan, China when the opening cases of pneumonia of unspecified origin were informed. The transmission frequency of the infectious disease and its rapid spread across many continents globally prompted the World Health Organisation (WHO) to characterise the outbreak as a worldwide pandemic on March 11, 2020, when the tally of confirmed incidents already had surpassed 118,000 in 114 nations (WHO, 2020).

In line with epidemiological data published by the WHO (2021a), the most credible prognoses purport to a zoonotic spillover in the Huanan Seaford Market sometime in early December 2019; this became an early and prime hotbed of SARS-CoV-2 infection. Following the SARS and MERS epidemics, acute endeavours were consigned to ascertain the animal reservoirs associated with the viruses and to retrace the chain of events that effectuated to the human spillover. It is currently common knowledge that both viruses stem from bats and were transferred to humans by intermediary hosts (El-Sayed and Kamel, 2021; Latinne, 2020). The initial cluster was closely tied to the aforementioned market trading live wild animals, though many of the preliminary 41 incidents soon after were testified to have no known exposure to the market (Zhu et al., 2020). The unfolding of new virulent infections is extensively cognate with socioeconomic, ecological, and environmental considerations (Daszak et al., 2008).

Yet, the scientific circles had constantly been admonitory regarding the diminution of biodiversity in fuelling the circulation of infectious diseases (Bartlow et al., 2021), however, no substantial actions were brought to remedy this. The COVID-19 outbreak yet again has brought to light the affiliations between the manifestation of grave virulent infections and ecological, macroclimate and health concerns, underlining the pressing necessity of devising a global scheme geared towards thwarting such incidents (Barouki et al., 2021).

Furthermore, just as the GFC disseminated globally attributable to worldwide economic and financial markets, globalization has facilitated this novel outbreak, developing into a pandemic through international travel. From this perspective, the impact of the COVID-19 outbreak is one that could have been averted (Woolhouse et al., 2016).

The circulation presented by the infection encouraged global endeavors and research to produce vaccines with the strive to thwart the outbreak and cushion the impact of the virus on the population. The affiliations built amongst governments, research laboratories, and governments burgeoned while many countries, especially the UK, participated and progressed in clinical trials; consequently, the UK vaccination campaign launched in November 2020. The UK vaccination uptake has consistently been high ever since; by March 2022, 92% of those aged 12 and over had obtained a first vaccine dose, 86% had taken both doses, while 67% had received a booster or third dose (Sasse and Hodgkin, 2022).

Curtailing the transmission of the COVID-19 malady and attaining the yearned herd immunity is predominately reliant on the mass inoculation campaigns on a global scale, positioning the biopharmaceutical industry to help champion a worldwide restoration process. Moreover, the unparalleled vast infection scale and limited healthcare system capacity create many challenges in devising a robust disease control strategy orientated toward the COVID-19 epoch. Various biopharmaceutical firms have prepared effective vaccines through the deployment of new technologies at an unparalleled pace; faster than for any other pathogen in history (Dong et al., 2021; Dagotto et al., 2020).

In spite of the cost and safety issues concerning vaccine administration, an effective vaccination scheme is only considered to be an irrefutable landmark eventually marking the end of the pandemic and one that leads to a resilient fiscal recovery (Forni and Mantovani, 2021; ElBagoury et al., 2021). Vaccines substantially alleviate the negative effect of previous pandemics (Gong et al., 2020). Estimates postulate that high-income countries would suffer 13-49% worth of global economic losses if no worldwide COVID-19 vaccinations were available through considerations such as global supply chains and reduced exports to low- and middle-income countries (Çakmaklı et al., 2021). Regarding economic and educational losses arising from COVID-19, the global value of vaccine capacity was forecasted through a paper by Castillo et al. (2021) whereby a three billion yearly vaccination programme would accompany a global benefit of USD$17.4 trillion. Achieving 70% vaccination volume is forecasted to reap benefits of $840.955 per head. The vaccine is also a vital factor propelling greater economic value considering the value of the vaccine is worth 5-15% of stock prices (Acharya et al., 2020).

Mass inoculation campaigns facilitate building herd immunity as discussed previously, alleviating the prospect of unbridled outbreaks posed by the pandemic and unforeseen contagion waves. The impact on the mortalities could not be overstated. The ultimate significance of vaccination campaigns is lower economic insecurity, reduced risk of unforeseen government policy changes, coupled with greater stability within capital markets ensuingly.

1.2 Problem Statement

It is without question that the COVID-19 outbreak has substantially impacted the global economy to the extent that it has become among the largest unprecedented public health crises in living memory (Qui et al., 2020; Kickbusch et al., 2020). Given that there were no particular drugs for the early pandemic phase, various countries implemented precautionary methods including quarantining, social distancing, lockdowns, and travel restrictions to mitigate viral circulation. Indeed, this infection encouraged global endeavours and research to produce vaccines with the strive to thwart the outbreak and cushion the impact of the virus on the population. There were assurances of restoring normality and stability in terms of stock markets. However, have markets succeeded? Would COVID-19 vaccinations stabilise stock markets?The COVID-19 crisis has inflicted considerable pressure upon financial markets internationally, resulting in severe consequencesfor global financial markets. There is ample evidence to suggest that previous pandemics have not negatively impacted financial markets to the extent that the COVID-19 has due to its sheer magnitude, velocity and significance (Iyke, 2020a;Altig et al., 2020).

The traditional financial theory postulates that the performance of firms is principally impacted by company-level factors,market availability and the macroeconomic environment concerned. Thus, where there is a variation in the economic climate of a certain sector, the operating conditions of companies within the sectors exhibit high correlations (Moskowitz and Grinblatt, 1999). In contrast, behavioural finance theory suggests that crises can severely affect investors’ behaviour through sentiments, biases, heuristics and herding; ultimately impacting financial markets in the process. Lee and Jiang (2002) confirmed that the investors’ optimism may lessen earnings volatility but pessimism may increase it.

Thus far, amongst the existing empirical literature that have investigated impact of vaccination programmes on stock markets, there is mixed evidence while none have implemented the event study methodology. From one perspective, studieshave observed that the expansion of the Pfizer-BioNTech vaccine heightened the financial volatility in both developed and developing markets (Bakry et al., 2021). On the other hand, a neoteric research establishes that the vaccination campaign substantially  lessens volatility throughout 66 countries (Rouatbi et al., 2021). This burgeoning research is, however, at its formative stage given that it only appraises the very preliminary reaction of financial markets to COVID-19 vaccine trials (Chan et al., 2021).

1.3 Original Contributions

This studyseeks to grasp how investorsrealise jump-tail risks and respond to a health and economiccrisis of the magnitude of theCOVID-19 pandemic. In attempting to investigate the empirical impact of vaccinations on financial markets, this study contributes to the literature in three important ways as follows.

Primarily, although some scholars have investigated the relationship between vaccinations and stock markets purely from a financial volatility angle, this study is the first to explore the impact on abnormal stock returns using an event study methodology with an emphasis on the differential reactions amongst numerous key sectors.

It is noteworthy that no literature has investigated the impact of COVID-19 vaccinations upon financial markets, especially the impact of the principal announcement of the COVID-19 vaccination programme where Pfizer-BioNTech declared their ground-breaking vaccines to be 90% effective; this thus constitutes the secondary core contribution behind this study. Also, no research has investigated potential positive episodesattributable to the COVID-19 outbreak, which bestows this study’s added value as it aids in enhancing understanding regarding how the FTSE-100 performs, about extraneous shocks, together with the potential fillip of a shock viz. the prime vaccine.

The tertiary core contribution lies in the fact that through investigating the influence of the vaccine on stock returns, several time windows were adopted whereas prior research, particularly within the COVID-19 pandemic domain, incorporate a singular time window or smaller windows.

This conducted research is about the UK stock market or the London Stock Exchange (LSE) because it is globally one of the oldest stock exchanges and its history can be traced back to over 300 years. Also by market capitalisation, it is globally the sixth-largest stock market and it is the largest in Europe (IG, 2022). The FTSE-100 has 100 listed companies capturing a market capitalisation of around £2 trillion and accounts for around 80% of the LSE’s market capitalisation (London Stock Exchange, 2022). Thus, the FTSE-100 has been utilised in this study. Markedly, the UK’s drive for the COVID-19 vaccination programme has been extremely fruitful given that it became the first country in the world to deploy an approved COVID-19 vaccination to the public and following its distinguished vaccination-rate (Schiffling and Breen, 2021). Prior studies demonstrates that the dissemination of virulent diseases would result in growing fear and pessimism amongst investors, thus we would anticipate that the vaccination programme would result in assuaging the sentiments which would eventually stabilise the financial markets (Awijen et al., 2022; Yu et al., 2022; Demir et al., 2021).

1.4 Aims and Objectives

The notion behind this research is that on one hand, the vast majority of financial markets have been detrimentally affected following the onset of the COVID-19 crisis attributable to sheer fear, uncertainty and embarking upon the “unknown”. On the other hand, financial markets were forecast to improve and stabilise following the news of the vaccine constituting a significant signal and prime solution to restore a “state of normalcy” in everyday life. Thus, a natural, pertinent question that emerges is whether a primitively indisputably adverse phenomena, in the form of the COVID-19 outbreak, can ultimately bring about amplified investor morale and thereby elevate stock market returns. To this end, the rationale of this study is to construct and clarify the impact of COVID-19 vaccines on financial markets via the following research questions:

Would the COVID-19 vaccination programme have a positive influence on stock returns of listed companies?
To what extent does the impact of the COVID-19 vaccination programme on financial markets vary across industries?

Following on from the WHO’s declaration of COVID-19 deemed as a pandemic in March 2020, in particular governments have been concerned about discovering vaccinations to galvanise and lift the economy. On the 9th of November 2020, Pfizer BioNTech proclaimed the efficacy of their vaccine trials to counter the infectious disease surpassed that of 90%. This constituted the announcement of the prime effectual COVID-19 vaccine, thus giving rise to much buoyancy particularly within stock markets, but also for society as a whole.

Regarding investor returns, information is deemed as amongst the most paramount elements in their trading decision-making, given that the trading strategy adopted by individuals is naturally premised upon their interpretation of the information captured. Those who advocate the Efficient Market Hypothesis consider that equity returns embody all publicly available information. However, evidence of market anomalies owing to the existence of market inefficiencies and psychological influences has revealed otherwise (Shiller, 2003).

To elucidate the short-run effect of the COVID-19 vaccine rollout on different sectors of the stock market, this study appraises the impact of the official announcement of the COVID-19 vaccine on the UK stock market. The outcomes and conclusions are anticipated to aid investors, business management, financial policymakers, regulatory bodies of stock exchanges, as well as the government to better grasp and gain a clearer insight into the short-term variations and performance of the major industry sectors; thus assisting in conducting better-informed decisions regarding future impacts and reinstating market sentiment.

1.5 Summary of Main Findings

This study contends that following the main COVID-19 vaccination announcement, many sectors responded positively and thus contribute to stabilizing and providing resilience within stock markets. These sectors include Banking Services, Homebuilding, and Construction Supplies, Software and IT Services, Metals and Mining, and Professional and Commercial Services. This is in contrast to the sectors which did not exhibit any significant reaction to the announcement, prior to or afterward including Insurance, Investment Banking and Investment Services, Pharmaceuticals, and Specialty Retailers. The study’s conclusions remain robust when applying an alternate estimation window (90 days as against 150 days). Overall, the research outcomes serve great importance for many stock market stakeholders including investors, policymakers, and governments to foster better decisions and/or implement new policies.

1.6 Outline

Section 2 reviews the relevant literature. This begins with the neoclassical theories (2.1) involving the Efficient Market Hypothesis (2.1.1) and the notion of rational, utility maximizing investors. This is followed by an alternate breed of theories that posit the existence of irrational investors and markets (2.1.2). This study then reviews the impact of previous economic events (2.2), natural disasters (2.3), and infectious diseases (2.4) on stock markets. A deeper insight into the effect of COVID-19 on stock markets ensues (2.4.1) followed by a review of existing studies that explore the interplay between COVID-19 vaccines and financial markets (2.4.2).

Section 3 explains the methodology and research design that underpins this study. It explains the event study methodology and details the rationale regarding the selection of the event day, estimation period, estimation window, and the dataset.

Section 4 presents data and findings followed by a discussion of these results.

Section 5 provides the summary and concluding remarks.

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