Abstract

In this paper, the author examines the role of uncertainty due to pandemic on the predictability of sectoral stock returns in South Africa. This is motivated by the ongoing global pandemic, COVID-19, in predicting sector stock returns.Design/methodology/approachThe study considers estimation of dynamic panel data with dynamic common correlated effects estimator and two pair-wise forecast measures, namely Campbell and Thompson (2008) and Clark and West (2007) tests in dealing with the nested predictive models.FindingsThe results show that pandemic uncertainty has a negative and statistically significant effect on the different sector returns, implying that sector stock returns decline as the pandemic outbreak becomes more pronounced. While the single predictor model consistently outperforms the historical average model both for in-sample and out-of-sample, controlling for other macroeconomic variables effect improves the forecast accuracy of infectious diseases uncertainty. These results are consistently robust to both the in-sample and out-of-sample forecast periods, outliers and heterogeneity. These results have implications for portfolio diversification strategies, which we set aside for future research.Originality/valueThe empirical literature is satiated with studies on how news can predict economic and financial variables, however, the role of uncertainty due to infectious diseases in the stock return predictability especially at the sectoral level is less understudied, this is the main contribution of the study.