When the scale of the COVID-19 pandemic became clear, one of the first places that reacted was the stock market. All around the world, stocks collapsed — and according to a new study, they did so before it was clear just how much the markets would suffer.

The famous economist John Maynard Keynes once said “the markets can remain irrational longer than you can remain solvent.” In the very long run, stock markets do follow the economic reality, but in the short term (and the short term can be up to a few years), they often behave irrationally.

The pandemic offered a unique opportunity to study markets, and market volatility in particular. In a new study, a team of researchers based at the University of Limerick in Ireland looked at how stock prices correlated with stock changes. They found that the growth in COVID-19 cases largely explained changes in stock prices, but surprisingly did not have the same impact in China or on the global index (MSCI World).

But the pandemic itself couldn’t really explain all the changes. Instead, lead author Niall O’Donnell suspects that the volatility of markets (which often revolves around investor sentiment) played a greater role in explaining market prices than COVID-19 growth.

“Our findings indicate that investors began to act before any realised financial damage was observed, highlighting again the significance of investor sentiment and the expectation of returns, rather than real revisions in financial returns. We additionally find that changes in the Chinese SSE 180 index and the MSCI World index prices were not significantly explained by COVID-19 growth.”

“Instead, these indices were largely influenced by conventional market drivers linked to economic growth such as crude oil, bond yield spreads and implied volatility. We theorise based on these results, that among these factors, early interventions by China may have played a role in index price fluctuations also,” added O’Donnell.

When the pandemic took hold and fears of a worldwide recession kicked off, $16 trillion were wiped from the global stock market in less than a month. Everyone took a hit. From big pharma to 5G penny stocks and from oil companies to food makers, everyone felt the effects. A part of this was perfectly rational — the pandemic was bound to cause big economic woes. But just how big was not yet clear. This initial uncertainty translated into a plummeting stock market.

In Spain, Italy, the UK, and the USA, markets went down as COVID-19 cases rose early during the pandemic — the correlation was present even when controlling for other market drivers. But in two other markets (China and the WCSI), the correlation was less present.

“Our results suggest that early interventions (China) and the spatiotemporal nature of pandemic epicentres (World) should be considered by governments, regulators and relevant stakeholders in the event of future COVID-19 ‘waves’ or further extreme societal disruptions,” the researchers write in the study.

Dr. Darren Shannon, another researcher involved with the study, says it’s important to draw lessons on how pandemics affect the stock market — and how different measures taken against the pandemic can also affect markets.

“COVID-19 cases did not significantly influence the sharp fall and subsequent rise of the Chinese SSE 180 index. Instead, fluctuations in market prices were explained by trading volumes, Brent crude oil price, implied market volatility, among other factors. Similarly, COVID-19 cases did not significantly influence the MSCI World index,” he added.

Ultimately though, stock markets rebounded and reached record levels — even as the economy is still struggling to catch up. Although the current economic crisis is not as pronounced as many experts feared, we’re still in very precarious territory.

The study was published in the Journal of Behavioral and Experimental Finance.