COVID-19 Uncertainty and the Cross-Sectional Stock Returns of Airlines

Chun-Yu Ho, Xiaojie Liu and Patrick S. McCarthy

A chapter in Airlines and the COVID-19 Pandemic, 2024, vol. 11, pp 71-90 from Emerald Group Publishing Limited

Abstract: This study examines the relationship between COVID-19 uncertainty and stock returns across US airlines. Using the pandemic uncertainty index (PUI) developed byAhir et al. (2022), we estimate a pandemic beta by augmenting the capital asset pricing model with the PUI as an additional factor. We find that the pandemic beta varies across airlines, which indicates the risk premiums of airline stocks associate with the level of pandemic uncertainty. Also, pandemic uncertainty amplifies the market risk of airline stocks. These results are relevant for asset managers whose portfolio allocation focuses on the airline industry. Further, we find that larger airlines with higher incomes and cash balances are less sensitive to the COVID-19 pandemic. These results highlight an important managerial implication for risk management, namely, that airlines with lower financial risks (i.e., a larger financial buffer) are more resilient to the COVID-19 pandemic.

Keywords: Airline industry; COVID-19; CAPM; cross-section of stock returns; pandemic uncertainty index (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aiaezz:s2212-160920240000011004

DOI: 10.1108/S2212-160920240000011004

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