Working Paper: CEPR ID: DP14674
Authors: Mariano Massimiliano Croce; Paolo Farroni; Isabella Wolfskeil
Abstract: We quantify the exposure of major financial markets to news shocks about global contagion risk accounting for local epidemic conditions. For a wide cross section of countries, we construct a novel data set comprising (i) announcements related to COVID19, and (ii) high-frequency data on epidemic news diffused through Twitter. Across several classes of financial assets, we provide novel empirical evidence about {financial dynamics (i) around epidemic announcements, (ii) at a daily frequency, and (iii) at an intra-daily frequency.} Formal estimations based on both contagion data and social media activity about COVID19 confirm that the market price of contagion risk is very significant. We conclude that prudential policies aimed at mitigating either global contagion or local diffusion may be extremely valuable.
Keywords: contagion; epidemic; asset prices
JEL Codes: G01; G1; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| epidemic announcements (E60) | cumulative equity returns (G12) |
| cumulative equity returns (G12) | resolution of uncertainty (D80) |
| epidemic announcements (E60) | downward trajectory of cumulative equity returns (G12) |
| government bonds (H63) | cumulative equity returns (G12) |
| market price of contagion risk (E44) | asset prices (G19) |
| contagion news (F65) | asset prices (G19) |