Implications of Stochastic Transmission Rates for Managing Pandemic Risks

Comparison of deterministic and stochastic SIS and SIR models in discrete time

Harrison Hong, Neng Wang and Jinqiang Yang

The Review of Financial Studies, 2021, vol. 34, issue 11, 5224-5265

Abstract: We introduce aggregate transmission shocks to an epidemic model and link firm valuations to infections via an asset pricing framework with vaccines. Infections lower earnings growth but firms can mitigate damages. We estimate a large reproduction numberand transmission volatility for COVID-19. Using these estimates, we quantify the bias of deterministic approximations based on . Our model generates predictions consistent with the data: unexpected infection resurgence, nonmonotonic 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: E20 G01 H56 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (14)

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