Implications of Stochastic Transmission Rates for Managing Pandemic Risks

Harrison Hong, Neng Wang and Jinqiang Yang

No 27218, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 G32 Q5 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-ore and nep-rmg
Note: AP EH PE
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Citations: View citations in EconPapers (3)

Published as Harrison Hong & Neng Wang & Jinqiang Yang & Ralph Koijen, 2021. "Implications of Stochastic Transmission Rates for Managing Pandemic Risks," The Review of Financial Studies, vol 34(11), pages 5224-5265.

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