Factors explaining the performance of the listed food and drink industry stocks during the covid-19 pandemic

Abstract

The 2020 covid-19 pandemic has been a historically exceptional situation through the impact it had on every aspect of the world we live in and financial markets have not been spared as the pandemic led to the biggest stock markets drop since the 2008 subprimes financial crisis. Lockdowns imposed by the pandemic had various and unforeseen impacts on the businesses depending on their ability to adapt to the exceptional situation or they characterization as essentials businesses or not. Even among the sectors historically classified as defensive, the resilience of some businesses has been severely tested. This never seen before situation offers a new opportunity to observe what are the factors explaining the stocks returns of firms from the historically defensive sectors. This thesis tries to identify the factors explaining the stock returns of the European food and drinks listed companies during the covid-19 pandemic crisis. In order to do so a principal component analysis will be applied on firm characteristics historically used to explain stock returns in order to reduce the dimensionality of the data set in linear combinations of these characteristics called principal components. Then these principal components will be rotated using a varimax criterion to increase their economic interpretability and these rotated components will be used as risk factors and risk factors long short portfolios will be created to capture the returns associated to exposure to these risk factors. Finally, these long short portfolio returns will be used in a Fama-Macbeth regression in order to assess the premia linked to the risk factors exposure and their statistical significance. The results of this thesis show that the classical impacting firm characteristics retrieved from the financial literature failed to explain the European food and drinks industry stock returns during the covid-19 pandemic.