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Who should be afraid of infections? Pandemic exposure and the cross-section of stock returns

Nusret Cakici and Adam Zaremba ()

Journal of International Financial Markets, Institutions and Money, 2021, vol. 72, issue C

Abstract: Does past stock price reaction to pandemics contain information about future returns? To answer this, we estimate firm exposure to a pandemic index representing global concerns of infectious diseases. We demonstrate that such a pandemic beta reliably predicts the cross-section of future stock returns. The highest pandemic beta decile outperforms the lowest pandemic beta decile by about 1% per month on a risk-adjusted basis. The effect is not explained by well-known return predictors and is robust to many considerations. Our findings indicate that investors do not correctly price information stemming from firms’ reactions to pandemics.

Keywords: Pandemic; Epidemic; COVID-19; Novel coronavirus; Pandemic index; Asset pricing; The cross-section of stock returns; Return predictability (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:72:y:2021:i:c:s1042443121000524

DOI: 10.1016/j.intfin.2021.101333

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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