“The impact of the COVID-19 outbreak on the Indian stock market – A sectoral analysis”

This paper aims to examine the impact of the COVID-19 outbreak on Indian firms listed on the NSE and analyze its impact on various sectors. In addition, a sub-sample analysis based on market capitalization was performed to understand the effect of size during extreme events. The sample consisted of 1,335 firms listed on the NSE India. A standard event study outlined by Brown and Warner (1985) was employed to analyze the price impact on the COVID-19 outbreak. The event windows from -10 days to +10 days were selected. The estimation window is 250 days. The Nifty 50 has been chosen as a proxy for market return. The sample firms witnessed a negative impact of the COVID-19 outbreak with a negative CAAR in different event windows. In addition, various sectors are classified according their responsiveness towards the COVID-19 outbreak into three groups: highly negatively affected, moderately negatively affected, and slightly negatively affected. The paper also points out that the pandemic substan-tially affects the above-median market capitalized firms than the below-median mar- ket capitalized firms, which contradicts the size effect phenomenon. The results assist shareholders in managing their portfolios and mitigate the systematic risk of their in- vestments during extreme events such as a pandemic, wars, and others. This study is the first comprehensive analysis of the impact of the COVID-19 outbreak on different sectors in India. It is also the first study to investigate the size effect anomalies during extreme events. existential threats, the workforce is at risk of losing jobs, and society is undergoing a paradigm shift. The crisis and its impact are also reflected in the stock market. Hence, the COVID-19 outbreak event is critical to examine stock price volatility. Stock prices are the pertinent measure of a firm’s performance and return to stakeholders. The financial theories and theory of behavioral finance on the capital market suggest that stock price movement is the function of the market and firm-based factors. Any economic or environmental event has an impact on the investors’ perception, which in turn affects stock prices. According to Lee and Jiang (2002), investor optimism condenses the return volatility, whereas a pessimist attitude intensifies the earnings volatility. The COVID-19 pandemic is also fetching an impact on different industries and potentially de-stroying some of the industries around the world. Most industries are


INTRODUCTION
The world is witnessing an unrecoverable loss due to the outbreak of the novel coronavirus, which has shuddered the entire world's economic and social terrain. The consequences of the pandemic are devastating as millions of lives are falling into poverty, ventures are facing existential threats, the workforce is at risk of losing jobs, and society is undergoing a paradigm shift. The crisis and its impact are also reflected in the stock market. Hence, the COVID-19 outbreak event is critical to examine stock price volatility.
Stock prices are the pertinent measure of a firm's performance and return to stakeholders. The financial theories and theory of behavioral finance on the capital market suggest that stock price movement is the function of the market and firm-based factors. Any economic or environmental event has an impact on the investors' perception, which in turn affects stock prices. According to Lee and Jiang (2002), investor optimism condenses the return volatility, whereas a pessimist attitude intensifies the earnings volatility. The COVID-19 pandemic is also fetching an impact on different industries and potentially destroying some of the industries around the world. Most industries are withering away due to the crises. At the same time, the situation has also provided an opportunity for various industries to flourish, such as manufacturing and logistics. According to the International Labour Organisation (ILO) report on various sectors, the pandemic has become a tight spot for the automobile industry. The catastrophic crisis is also reflected in the intense volatility of the global financial market, where emerging markets have observed an outflow of $90 billion investment 1 . The capital markets are the best indicators of the investor's perception regarding future trends, and they can reflect on what lies ahead. Viewing the investors' movement, the impact of outbreaks on stock prices portrays the sentiments of the investors.
The consequences of COVID-19 are not restricted to only selected domains but apparent in all spheres of society, which is anticipated to have a prolonged effect on the economy. However, the degree of the impact may vary from sector to sector and from country to country. In response to the slow economic activities, the stock markets around the world have reacted noticeably. The possible explanation for the reactions is attributed to government restrictions on mobilities and commercial activities, which have impacted the service sector (Baker et al., 2020). Adopting an event study approach, considering the lockdown announcement as an event, the study intends to examine the impact of the COVID-19 outbreak on stock prices of various Indian industries. Therefore, the stock prices of those industries that react to the pandemic of Novel Coronavirus (COVID-19) have been analyzed. 1 The impact of COVID-19 on capital markets | McKinsey. The purpose of the study is to analyze the association between the COVID-19 outbreak and stock market price volatility. The analysis is conducted on Indian firms listed on the NSE, and also the impact of the COVID-19 outbreak on various sectors is investigated. The prime novelty of the paper is to examine the size effect during extreme events. Therefore, a sub-sample analysis based on market capitalization is performed.

LITERATURE REVIEW
An event-based methodology is extensively used in finance to study the market reactions to certain events. Therefore, in this paper, an event study method proposed by Fama et al. (1969) is used to study the impact of the pandemic on various industries. The paper substantiates the stock market reaction based on the prevailing literature on the relationship between crises and stock price fluctuations.

DATA
Since the end of December 2019, news of the COVID-19 outbreak in Wuhan, China, circulated on an online platform. However, India saw an increase in the spread of COVID-19 in March 2020.

METHODOLOGY
To explore the effect of the COVID-19 outbreak on the Indian stock market, this paper applies an event study methodology. The event study methodology is used to capture the short-term price effect that occurred after a specific event. There are mainly three methods for calculating the abnormal price effect, namely average adjusted return rate method, market model, and market index adjusted return rate models. Dyckman et al.
(1984) investigated all the above three models and concluded that the OLS-based market model gives improved results. Hence, the OLS market model is used for calculating the normal return. The event study methodology outlined by Brown and Warner (1985) was employed, which uses the market model method. To know the significance of the results, the parametric test, a cross-sectional t-test proposed by Brown and Warner (1980) is conducted.
Before conducting an event study, it is essential to determine the event window, event date, estimation period, and event of interest. The event studied in this paper is the impact of the COVID-19 outbreak in India on the Indian stock market. A 250-day estimation window is considered, and the period starts from 260 days before the event day to 10 days before the event day. An event window of 21 days is used for the study. The event window comprises an event day, twenty days a pre-event day, and twenty days post-event day. The following are the steps for calculating the abnormal return.
Estimate the normal market return: where α and β are the intercept and slope coef-  in event day, one-day, three-day events windows, respectively. The results are significant in parametric tests in all event windows. However, after five-day event windows, the share prices started to recover. The ten-day event window shows a negative CAAR of 6% approximately, and the results are significant in parametric tests. The results documented daily negative returns in terms of CAAR and AAR in the pre-event days, event days, and post-event days. Table 2 shows the day-wise cumulative average abnormal returns (CAAR) and average abnormal returns (AAR) for the NSE-listed firms to show the impact of the COVID-19 outbreak. Figure 1 summarizes the results presented in Table. 4

.2. Impact of COVID-19 on various sectors
With the rapid increase in the spread of the COVID-19 virus in India, the government had to take strict quarantine measures such as a lockdown.
To explore the sector-wise impact of COVID-19, the sector wise event study was conducted separately. A total of 19 sectors are used to explore the sectoral implications of COVID-19 to find out which sectors are most affected by the COVID-19 outbreak. Table 3 shows the cumulative average abnormal returns (CAAR) for the textile, media, financial services, healthcare services, and drug and pharma sectors due to the announcement lockdown in India. It can be observed from Table 3 that financial services are the most affected sectors with more than 10% negative CAAR in post-event windows. Moreover, textile and healthcare services have seen the moderate impact of COVID-19 with a negative CAAR of less than 10% but more than 5% in the post-event day window. However, the drug & pharma, and media sectors have seen a low impact with less than 5% of the negative CAAR during the post-event period. Table 4 shows the cumulative average abnormal returns (CAAR) for plastic, banking, metal, agriculture, and automobile sectors on the announcement lockdown in India.
It can be observed from Table 4 that all the sectors are highly affected by the COVID-19 outbreak with a negative CAAR of more than 10%. The results are significant, and in the post-event period, sectors have seen more than 15% negative abnormal returns. The metal sector was worst affected as it has experienced a negative CAAR of more than 18% in the post-event windows. Table 5 shows the cumulative average abnormal returns (CAAR) for electrical goods, chemical, tourism, transportation services, and computers industries on the announcement lockdown in India.  Note: N stands for the sample size, t-stats is the t-statistic for significance.
It can be observed from Table 5 that the electrical goods and transportation sectors have witnessed the highest negative impact of COVID-19 with a negative CAAR of more than 10% in the post-event period. Hence, these sectors are significantly affected by COVID-19. To a certain extent, the chemical, computer & its accessories and tourism sectors were also moderately negatively impacted by COVID-19 with a CAAR of more than 5% but less than 10% in post-event windows. Table 6 shows the cumulative average abnormal returns (CAAR) for FMCG, paper, construction, and electricity sectors on the announcement lockdown in India.
It can be observed from Table 6 that the construction sector has seen the highest impact of COVID-19 with a negative CAAR of more than 10%. Besides the construction sector, FMCG, paper, and the electricity sector have also seen negative CAAR of more than 5% but less than 10% in post-event windows. Figure 2 assists in the discussion about the impact of COVID-19 on different sectors. It depicts the impact of COVID -19 on various sectors using CAAR in a ten-day event window. The sector-specific price effect on the event of the COVID-19 outbreak can be classified into three groups: highly negatively affected sectors, moderately negatively affected sectors, and low affected sectors. Note: N stands for the sample size, t-stat is the t-statistic for significance. The highly negatively affected sectors are financial services, metal, plastic, banking, automobile, electrical goods, transportation services, agriculture, and construction sectors. These sectors witnessed the highest negative impact of COVID-19 with a negative CAAR of more than 10% post-event windows. The prime sector impacted by COVID-19 restrictions during the lockdown period was transportation services. Therefore, the shares of transportation services companies show a negative return in every event window. The share prices of the metal and mining sectors continued to decline as the metal and mining sector is heavily dependent on transportation and logistics sec-tors. The financial services sector's share prices drop significantly because of high liquidity pressure and the Franklin Templeton fiasco, which triggered the panic selling in debt instruments. At the same time, construction sectors that require significant labor resources were impacted because of the shortage of labor force as labor migrated to their homeland. Hence, share prices declined in the sectors mentioned above.
The moderately negatively affected sectors are textile, chemical, healthcare services, tourism, paper, computer and related accessories, electricity, Fast Moving Consumer Goods (FMCG) sectors. Note: N stands for the sample size, t-stat is the t-statistic for significance. These sectors witnessed the moderate negative impact of COVID-19 with a negative CAAR between 5% to 10% in post-event windows. India took quarantine measures such as lockdown to restrain against the spread of the virus on the eve of the COVID-19 outbreak. The migrant workers returned to their homeland, which created a scarcity of labor forces, resulting in reduced operations of factories in various sectors such as plastic, chemicals, and textiles. However, these sectors get opportunities to produce masks, sanitizers, personal protective equipment (PPE) kits, face shields, and others that were incentivized by the government of India. Hence, these opportunities lower the impact of the COVID-19 outbreak on the sectors as mentioned above. The pandemic also had a significant effect on the agricultural sectors because of the shortage of labor forces and rural investment, which immediately reflected in the share prices of the concerned sector. The outbreak of COVID-19 moderately affected the electrical goods and FMCG sectors. These sectors faced a demand decline, which resulted in lower sales, and hence, the price of shares declined immediately after quarantine measures were taken by the government of India.
The slightly negatively affected sectors are media and drug & pharma. These sectors witnessed a negative CAAR of less than 5% in post-event windows.
Despite the overall crackdown of the stock market on the outbreak of COVID-19 in India, some sectors have shown slightly negative abnormal returns against the trend showing strong resistance against the pandemic. COVID-19 created an opportunity for the drug and pharma sectors. With the increase in patients, the sales continue to grow, translating into share prices in multiple event windows. In the media sector, there is a less negative price effect as there is no impact on print or electronic media, and no quarantine measures are applied to them. They worked as usual. Thus, advertising revenues for media houses have not declined.

Further study
Companies with different sizes have different abilities to retrain the external shocks. Companies with different sizes often have an asymmetry in their price reactions (Gaunt et al., 2000). Banz (1981) provides evidence that small market capitalization firms have more abnormal returns than high market capitalization firms due to the size ef- The samples are divided based on the median of the market capitalization into the above-median and below-median companies. Table 7 shows the cumulative average abnormal returns (CAAR) for both above-median and below-median market capitalization firms on India's announcement lockdown. Table 7 shows that during the COVID-19 outbreak, abnormal returns of above-median market capitalized firms were significantly negative and showed a greater decline in share prices, while below-median market capitalized firms showed a comparatively lower negative price reactions. The results contradict the size effect phenomenon as larger firms have more institutional ownership. With the COVID-19 outbreak and Franklin Templeton's fiasco, institutional investors started to liquidate their position, which created panic selling in the capital market. Therefore, firms observed a higher negative impact on larger firms after the COVID-19 outbreak due to liquidity pressures. The situation mentioned above confirms that the COVID-19 outbreak has a significant impact on the above-median market capitalized firms, which indicates that higher-sized firms are more prone to shocks or crash risks. Figure 3 compares the impact of COVID-19 on the above and below median market capitalization firms using CAAR in post-event windows.

CONCLUSION
The study shows that NSE-listed firms negatively responded to the COVID-19 outbreak, with more than 6% negative CAAR in 10-day event windows. Next, the price response of various sectors to the outbreak of the pandemic is analyzed. The highly negatively affected sectors have experienced a negative abnormal return of more than 10% in 10-day event windows, including financial services, metal, automobile, transportation services, construction sectors, and rest. In addition, moderately negatively affected sectors have seen negative CAAR of 5% to 10% in the 10-day event window, including electricity, textile, plastic, chemical, Fast Moving Consumer Goods (FMCG) sectors, and others. However, few sectors are slightly negatively affected with a negative abnormal return of less than 5% in 10-day event windows, and these sectors are media and drug & pharma sectors. Also, the findings revealed that the Covid-19 outbreak impacted larger firms more negatively than smaller firms in each event window, which is contrary to the findings of prior literature. To a large extent, the stock market reflects the economic condition of a large number of companies, whereas the capital market represents a complete state of a country's economy. Therefore, any fluctuation in economic activities can be analyzed through the movement of the stock market. In India, about 43 percent of the stock market participants are retail investors, which sets India apart from other emerging markets. Hence, this study better reflects investor behavior during extreme events. Thus, the study contributes to the literature on extreme events and investor behavior with some practical implications.
This study also improves understanding of the response of various industries to the pandemic. Furthermore, since the size of a firm acts as a substantial determinant in absorbing the impact of extreme events, this study also helps us understand the impact of the pandemic on firms with varying sizes.
The conclusions drawn in the paper help to understand the stocks' responses to extreme events in the context of emerging countries. The results show the role of information in influencing the stock market in emerging countries such as India. From a practical perspective, the finding suggests that portfolio managers should consider a proper mix of low and high beta stocks with an appropriate mix of sectors.
The study has shown that smaller stocks are less impacted by panic selling after extreme events. Hence, it would be prudent for portfolio managers to give due consideration to smaller stocks. These suggestions would help maximize returns and protect investment from capital erosion in extreme events.