Working Paper: CEPR ID: DP15558
Authors: Viral Acharya; Tim Johnson; Suresh M. Sundaresan; Steven Zheng
Abstract: We provide an estimate of the value of a cure using the joint behavior of stock pricesand a vaccine progress indicator during the ongoing COVID-19 pandemic. Our indicatoris based on the chronology of stage-by-stage progress of individual vaccines andrelated news. We construct a general equilibrium regime-switching model of repeatedpandemics and stages of vaccine progress wherein the representative agent withdrawslabor and alters consumption endogenously to mitigate health risk. The value of a curein the resulting asset-pricing framework is intimately linked to the relative labor supplyacross states. The observed stock market response to vaccine progress serves toidentify this quantity, allowing us to use the model to estimate the economy-wide welfaregain that would be attributable to a cure. In our estimation, and with standardpreference parameters, the value of the ability to end the pandemic is worth 5-15%of total wealth. This value rises substantially when there is uncertainty about the frequencyand duration of pandemics. Agents place almost as much value on the abilityto resolve the uncertainty as they do on the value of the cure itself. This effect isstronger – not weaker – when agents have a preference for later resolution of uncertainty.The policy implication is that understanding the fundamental biological andsocial determinants of future pandemics may be as important as resolving the immediatecrisis.
Keywords: pandemic; vaccine; covid19; rare disasters; regime-switching; parameter uncertainty
JEL Codes: G12; D5; I1; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty about the frequency and duration of pandemics (C41) | Increase in the value of the ability to end the pandemic (H56) |
| Value of the ability to end the pandemic (H12) | Agents value the resolution of uncertainty almost as much as the value of the cure itself (D81) |
| Reduction in expected time to deployment of a vaccine by one year (C41) | Increase in stock market returns (G17) |