A Clustering based approach to study the impact of COVID - 19 pandemic on Colombo stock exchange

Abstract

Investor’s main objective is to maximize the portfolio returns while minimizing the risk. Unsystematic risk inherent to the industry can be minimized by diversification and systematic risk is hard to avoid. Main reason for the systematic risk is economic recession and covid pandemic is the most recent recession affected Sri Lankan economy. The primary objective of this research is to study the impact of covid-19 pandemic on risk and return of all listed companies in Colombo stock exchange (CSE) using clustering-based approach. For this study stock market data for 3-year period from 1st January 2019 to 31st December 2021 were used. The first dataset of All share price index (ASPI) which represent the behavior of all the listed companies was used to identify the different periods. Using the background study and performing structural breakpoint tests the entire period was divided in to 5 meaningful periods. The second data set with daily open and close price of 289 companies were used for the clustering. Expected return and variance of each company in each period were used as the inputs for the clustering. K means clustering was used to achieve the main objective of clustering. When clustering the basic idea was to achieve meaningful clustering based on risk return tradeoff to facilitate better investment decision. Then the composition of clusters from period to period were analyzed with relevant to industry classification. The cluster analysis shows that first and second period in year 2019 before the covid pandemic can be divided in to 4 clusters. During covid first wave market can be clearly separated in to 4 clusters, during covid second wave 6 clusters and during the third wave 3 clusters. Some companies have performed unusually with high returns and high variance during covid first wave and third wave. Further by monitoring the shift of clusters from period to period set of companies were suggested as the high performing companies despite the covid pandemic for the Risk seeking investors. Another set of companies which obtain high returns during the pandemic by tolerating moderate level of risk were suggested for the Risk neutral investors. The remaining set of companies are suitable for the Risk Averse investors. Finally, the study concludes that there is an impact of the covid -19 pandemic for the number of listed entities in the stock market, composition of clusters and risk return level of individual companies at different stages of a Recession.