Abstract:
The COVID-19 epidemic has affected and is still affecting the overall world and many countries are
facing economic recessions due to the financial instability and new challenges with the serious variants
of the new Coronavirus. With the higher level of uncertainty in the economy, economists and financial
specialists are struggling to estimate and predict the future behavior of the economy even if it is a more
challenging dilemma. The purpose of this study is to examine the financial shocks in the stock markets
of India and Sri Lanka amid the pandemic. The paper employs time series regression analysis on
secondary data collected from the Colombo Stock Exchange and the Bombay Stock Exchange of India
with daily data from February 1st, 2020, to March 31st, 2021, which is designated as the COVID-19
pandemic era. COVID-19 positive cases have a significant impact on financial shocks in both countries
whereas COVID-19 deaths do not affect financial shocks either in India or Sri Lanka. This study is the
first study to examine the impact of the COVID-19 outbreak on financial shocks in both countries of
India and Sri Lanka. It sheds a light on a new paradigm for demonstrating the most influencing factor
of the COVID-19 outbreak towards financial shocks in the economy. Only two Asian countries have
been considered as the population and future research studies can be conducted considering all Asian
countries. Moreover, the model can be further developed by incorporating more variables with the
dimensions of demand and supply side financial shocks. This study contributes to the existing theory by
analyzing two models and the findings may have implications for the policymakers to make effective
decisions during the pandemic without struggling with uncertainty in stock markets to reassure
investors’ confidence by identifying the most forcing factor for financial shocks.
