Working Paper: NBER ID: w26950
Authors: Laura Alfaro; Anusha Chari; Andrew N. Greenland; Peter K. Schott
Abstract: We show that unexpected changes in the trajectory of COVID-19 infections predict US stock returns, in real time. Parameter estimates indicate that an unanticipated doubling (halving) of projected infections forecasts next-day decreases (increases) in aggregate US market value of 4 to 11 percent, indicating that equity markets may begin to rebound even as infections continue to rise, if the trajectory of the disease becomes less severe than initially anticipated. Using the same variation in unanticipated projected cases, we find that COVID-19-related losses in market value at the firm level rise with capital intensity and leverage, and are deeper in industries more conducive to disease transmission. These relationships provide important insight into current record job losses. Measuring US states' drops in market value as the employment weighted average declines of the industries they produce, we find that states with milder drops in market value exhibit larger initial jobless claims per worker. This initially counter-intuitive result suggests that investors value the relative ease with which labor versus capital costs can be shed as revenues decline.\n
Keywords: COVID-19; stock returns; pandemic; firm-level analysis; aggregate analysis
JEL Codes: E27; F1; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected changes in the trajectory of COVID-19 infections (F44) | U.S. stock returns (G12) |
| unanticipated doubling of projected infections (F17) | next-day decreases in aggregate U.S. market value (G14) |
| unanticipated halving of projected infections (F17) | next-day increases in aggregate U.S. market value (G14) |
| COVID-19-related losses in firm-level market value rise with capital intensity (D25) | higher returns (G12) |
| larger initial jobless claims per worker (J65) | smaller losses in market value (G19) |
| relative ease with which labor can be shed compared to capital costs (J63) | market performance (G14) |