Stock valuation during the COVID-19 pandemic: An explanation using option-based discount rates

Henk Berkman and Hamish Malloch

Journal of Banking & Finance, 2023, vol. 147, issue C

Abstract: Changes in short-term expected market returns (discount rates) were a significant driver behind the unprecedented fluctuations in equity markets during the first 4 months of the COVID-19 pandemic. Using option-based estimates of the expected market risk premium for 13 international markets, we find that approximately 40% of the change in market values during the COVID-19 pandemic can be attributed to changes in short-term discount rates. We also document sharply downward sloping term structures of equity risk premia at the start of the pandemic, consistent with Hasler and Marfè (2016). Finally, we document a significant increase in the correlation between index returns and changes in the short-term discount rate during the pandemic compared to the period before the pandemic.

Keywords: COVID-19; Option implied market risk premium; Stock return decomposition; Disaster asset pricing (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:147:y:2023:i:c:s037842662100337x

DOI: 10.1016/j.jbankfin.2021.106386

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