Working Paper: NBER ID: w27218
Authors: Harrison Hong; Neng Wang; Jinqiang Yang
Abstract: We develop a model of pandemic risk management and firm valuation. We introduce aggregate transmission shocks into an epidemic model and link valuations to infections via an asset-pricing framework with vaccines. Infections lower earnings growth but firms can mitigate damages. We estimate a large reproduction number R0 and transmission volatility for COVID-19. Using these estimates, we assess the accuracy of deterministic approximations based on R0. Our model generates predictions consistent with data: unexpected infection resurgence, non-monotonic mitigation policies, and higher price-to-earnings ratios during a pandemic. Valuations would be significantly lower absent mitigation and a high vaccine arrival rate.
Keywords: COVID-19; Pandemics; Stochastic Epidemic Model; Reproduction Number; Transmission Volatility; Vaccines; Risk Management; Stock Market Valuation; Mitigation; Stochastic Control
JEL Codes: G12; G32; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher infection rates (I14) | Lower earnings growth for firms (D22) |
| Mitigation strategies (Q54) | Reduced impact of infections on earnings (I14) |
| Mitigation measures (Y20) | Improved financial outcomes (G19) |
| Presence of vaccines (I19) | Decrease in infections (I14) |
| Decrease in infections (I14) | Boost in firm valuations (G34) |
| Unexpected infection surges (I12) | Impact on price-to-earnings ratios (G19) |