What caused global stock market meltdown during the COVID pandemic–Lockdown stringency or investor panic?

•The different effects of COVID-19 on the stock markets are identified.•The stock market return is partitioned into returns from two different channels; returns due to expected growth and returns due to updation of market risk premium.•The interplay between the effects of COVID-19, the panic effect, and the stringency of the lockdown effect, and the channels of the returns are studied.•Panic is found to impact the stock market returns through the market risk premium updation channel.•Lockdown stringency is found to have a two-way effect on stock market returns, reducing it through the growth channel but increasing it through the market risk premium updation channel. This paper isolates the different effects of COVID-19 on the stock market returns and identifies the channels through which each of the effects influences the returns. Using a sample of twelve countries with most liquid stock markets, we find that the panic caused by the pandemic affects the stock return negatively through the updation of market risk premium channel. The stringency of the lockdown has a two-way effect on the stock market returns, whereas it affects the return negatively through the updation of growth forecasts, it also affects the return positively through the updation of market risk premium.