It’s cold and flu season. And no one is immune, not even Wall Street.
That’s the notion Brian McTier, a WSU Vancouver-based business school faculty member, and his colleagues explored when examining the impact of influenza on the U.S. stock market. McTier has been examining external events that might affect the stock market that weren’t normally modeled. Those effects include class action suits in securities, electronic funds transfer errors driven by sentiment, and the flu.
For the study, which is being published in the Journal of Financial and Quantitative Analysis, the authors started with the hypothesis that high rates of influenza could affect trading as key people could be out sick or on family sick leave. Those people could be the New York-based analysts at firms like J.P. Morgan and Goldman Sachs. These are the experts who are reviewing companies and reporting the news that could drive a stock up or down, and cause trading activity to increase.
McTier mined data on the New York Stock Exchange as well as reports of flu from the Centers for Disease Control. What he found was the greater the incidence of flu in the area of New York City, the lower the number of trades, the lower the realized volatility. But he and his co-authors also found that a higher incidence of flu nationally has an effect on the bid-ask spread, or the difference between the highest price a buyer will pay and the lowest price a seller will sell. That means that things don’t move as smoothly if you want to sell your stock during a time when there’s a national incidence of flu, says McTier. “It’s harder for you to sell because there are fewer people to sell to.”
McTier also explored whether an outbreak in the community where a company is headquartered had an impact on the stocks. It would be as if Columbia, the sportswear manufacturer headquartered in Portland, suffered lower stock prices if there was a flu outbreak in Portland. “We did expect a more local influence,” says McTier, “but didn’t really find it.”
Finally, he and his cohorts looked at how a pandemic, like the 1957-1958 outbreak known as the Asian flu, a category 2 pandemic flu that originated in China and spread to the United States by 1957, would affect equity returns. “It is reasonable to conclude that a large outbreak would take a large amount of participants out of trading and would strongly affect the liquidity of the market,” he says.
The take-away from this study is that flu costs money. If you’re trying to sell a stock, for example, you might not get as good a price because there’s simply less activity in the market and fewer buyers may be willing to meet your price. But by the time you know it’s happening, the effect is already in. “Flu impacts trading and impacts returns during that period [of outbreak],” says McTier. But if you are making trades, what the flu might cost you is so small, “I don’t know that it should stop you from doing what you’re doing.”