The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/1940-5979.htm Impact of Stock market liquidity, the great COVID-19 on lockdown and the COVID-19 stock market global pandemic nexus liquidity in MENA countries 51 Anas Alaoui Mdaghri and Abdessamad Raghibi Received 21 June 2020 Revised 23 September 2020 National School of Business and Management (ENCG), Ibn Zohr University, 25 October 2020 Agadir, Morocco Accepted 27 October 2020 Cuong Nguyen Thanh Faculty of Accounting and Finance, Nha Trang University, Nha Trang, Vietnam, and Lahsen Oubdi National School of Business and Management (ENCG), Ibn Zohr University, Agadir, Morocco Abstract Purpose – The purpose of this paper is to investigate the impact of the global coronavirus (COVID-19) pandemic on stock market liquidity, while taking into account the depth and tightness dimensions. Design/methodology/approach – The author used a panel data regression on stock market dataset, representing 314 listed firms operating in six Middle East and North African (MENA) countries from February to May 2020. Findings – The regression results on the overall sample indicate that the liquidity related to the depth measure was positively correlated with the growth in the confirmed number of cases and deaths and stringency index. Moreover, the market depth was positively related to the confirmed cases of COVID-19. The results also indicate that the liquidity of small cap and big cap firms was significantly impacted by the confirmed number of cases, while the stringency index is only significant for the liquidity depth measure. Moreover, the results regarding sectors and country level analysis confirmed that COVID-19 had a significant and negative impact of stock market liquidity. Research limitations/implications – This paper confirms that the global coronavirus pandemic has decreased the stock market liquidity in terms of both the depth and the tightness dimensions. Originality/value – While most empirical papers focused on the impact of the COVID-19 global pandemic on stock market returns, this paper investigated liquidity chock at firm level in the MENA region using both tightness and depth dimensions. Keywords Coronavirus, Stock market, Liquidity, MENA Paper type Research paper Introduction The first months of 2020 brought a new challenge to our economies, with a shift in focus away from the traditional “usual” business risk panoply. The outbreak of the COVID pandemic put the markets under great stress and led to unprecedented uncertainty. All the affected countries and the attendant international investors were bound to be influenced by the speculative news about how deadly the virus was, when a vaccine would be available and how the governments were intending to respond to the crisis (Wagner, 2020). Reports surfaced indicated that the CBOE volatility index had exceeded the previous all-time peak that occurred during the 2008 financial crisis. Markets throughout the world experienced an intense state of high volatility and immense uncertainty. However, the panic has subsequently dissipated, with buy and sell movements beginning Review of Behavioral Finance to emerge again across the globe. Indeed, the current crisis has affected various economic Vol. 13 No. 1, 2021 pp. 51-68 © Emerald Publishing Limited 1940-5979 JEL Classification — G01, G40, G41 DOI 10.1108/RBF-06-2020-0132 RBF sectors in terms of creating opportunities driven by the wealth transfer mechanism. Here, 13,1 Xinhua (2020) reported that while China experienced the first wave of the pandemic, its financial market remained largely stable. The earlier stock market volatility was arguably related to investors’ overreaction, which was likely driven by various factors, including the intensive media coverage. The stock markets’ global integration can also partly explain the first wave of panic in the markets, which was rapidly controlled, and the markets returned to a state of stability. In fact, many central banks across the world intervened in the financial 52 markets through monetary policy easing and liquidity injection measures. While many continue to believe that the stock market is a place governed by greed, excessive risk taking and unethical behaviour, in reality, it is a vital indicator for the well- being of an economy due to its pricing feature, which enables policy makers and investors to develop a view of the future state of the economy. Here, stock market liquidity plays a major role since it allows different stakeholder to safely hold and exchange stock market instruments. Nonetheless, the stock markets have endured significant shocks due to the panic and the uncertainty surrounding the global economies. Researchers have established a direct link between bid–ask spread widening and uncertainty. Thus, the liquidity in the stock markets is expected to decrease, but in unequal terms throughout the various economic sectors since some have been more negatively impacted than others. On March 11, 2020, the COVID-19 outbreak was declared by the WHO as a global pandemic [1]. This led to most countries restricting movements, limiting public gatherings and reducing commercial air travel to a minimum. The reliance on such strategies was largely influenced by the measures adopted by China as the outbreak first surfaced. John Hopkins University (2020) reported that by March 2020, the containment measures adopted by China had helped to halt the spread of the virus and had significantly reduced the number of confirmed new cases. The reason for the stock markets’ relative immunity to pandemic-based shocks relates to the huge government support provided to the financial markets during such events. JPMorgan Insights (2020) summarises the major international government intervention plans that brought some stability to the financial markets. Here, the Federal Reserve unveiled a package of measures that included the purchase of assets ($500bn in treasuries and $200bn in mortgage-backed securities). Meanwhile, the ECB announced a 750bn euros pandemic emergency purchase program (PEPP) on top of the ongoing asset purchase program (APP), which followed the 2008 financial crisis and the Greek sovereign debt crisis. Elsewhere, the Bank of Japan announced that it would double stock purchases and would help companies obtain loans in response to the coronavirus pandemic. Moreover, it pledged to buy exchange- traded funds (ETFs) at an annual pace of around 12 trillion yen ($112.55bn) alongside further reductions in interest rates. Traditional theories attempt to explain stock markets features such as return and volatility based on investors’ rational behaviour. However, empirical studies have demonstrated that the behaviour of real-life investors differs from that traced in the traditional models. Indeed, uninformed investors often tend to operate outside of the systematic and informed behaviour of institutional investors, generally to their own detriment. This factor and the high media exposure that occurs in times of crisis means that many investors tend to take decisions outside of the framework of rationality, which results in a sharp decline and liquidity pressures in certain sectors. Since the media coverage of the ongoing global pandemic can be described as both huge and unprecedented, investors’ behaviour is undoubtedly being driven by these variables, which could lead to stock market dysfunction. While the volatility and liquidity pressures have been eased through intensive government intervention in the developed countries, the situation in developing countries is more complicated and divergent. In fact, Morocco tentatively cut the interest rates by 0.25%; Tunisia adopted a 100bps cut, while Egypt drastically decreased its interest rate by Impact of 300 points. Meanwhile, the stock markets have reduced the maximum variation thresholds to COVID-19 on reduce stock market volatility. The volatility was also amplified by the uncertainty surrounding the economic strength of the developing countries and the low economic growth stock market expectations. This may lead to foreign investors abandoning these markets, which will liquidity subsequently magnify the liquidity pressure among the local financial markets. Stock markets in the Middle East and North African (MENA) region are known to be heterogonous due to the economic and social disparities. While the stock markets of Casablanca 53 and Tunisia are relatively small and are facing various liquidity challenges, those in the Gulf region are more developed, with the Saudi Tadawul by far the largest market in the region. The OECD (2012) outlined six common features of the stock markets in the MENA region as follows: widespread state ownership, low regional integration, moderate competition for listing, young markets, a high level of retail investment and a diversification of financial products. The novelty of the current pandemic combined with the new emerging international patterns, such as intensive globalisation, the rapidly growing technologies and media banalisation, are the main motivations behind this paper. The current situation offers us an opportunity to study how market actors have reacted to the pandemic and how stock market liquidity has been affected. In addition, we examine the sector-related impact of this crisis since the confinement policies and the travel bans applied by most countries have significantly affected a number of sectors. Specifically, this paper investigates the impact of the great lockdown