Working Paper: NBER ID: w28127
Authors: Viral V. Acharya; Timothy Johnson; Suresh Sundaresan; Steven Zheng
Abstract: We provide an estimate of the value of a cure using the joint behavior of stock prices and a vaccine progress indicator during the ongoing COVID-19 pandemic. Our indicator is based on the chronology of stage-by-stage progress of individual vaccines and related news. We construct a general equilibrium regime-switching model of repeated pandemics and stages of vaccine progress wherein the representative agent withdraws labor and alters consumption endogenously to mitigate health risk. The value of a cure in the resulting asset-pricing framework is intimately linked to the relative labor supply across states. The observed stock market response to vaccine progress serves to identify this quantity, allowing us to use the model to estimate the economy-wide welfare gain that would be attributable to a cure. In our estimation, and with standard preference 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 frequency and duration of pandemics. Agents place almost as much value on the ability to resolve the uncertainty as they do on the value of the cure itself. This effect is stronger – not weaker – when agents have a preference for later resolution of uncertainty. The policy implication is that understanding the fundamental biological and social determinants of future pandemics may be as important as resolving the immediate crisis.
Keywords: COVID-19; Vaccine Development; Asset Pricing; Pandemic Economics
JEL Codes: D5; G12; I1; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| vaccine delivery (L87) | economic recovery (E65) |
| value of a cure (J17) | total wealth (D31) |
| uncertainty regarding future pandemic occurrences (D84) | value of a cure (J17) |
| resolution of uncertainty (D80) | value of a cure (J17) |
| vaccine progress (I15) | stock market returns (G17) |
| reduction in expected time to vaccine deployment (F17) | stock market returns (G17) |