Why a pandemic recession should boost asset prices (... according to standard economic theory)

Lucas Herrenbrueck

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: Economic recessions are traditionally associated with asset price declines, and recoveries with asset price booms. Standard asset pricing models make sense of this: during a recession, dividends are low and the marginal value of wealth is high, causing low asset prices. Here, I develop a simple model which shows that this is not true during a recession caused by consumption restrictions, such as those seen during the 2020 pandemic: the restrictions drive the marginal value of wealth down, and thereby drive asset prices up, to an extent that tends to overwhelm the effect of low dividends.

Keywords: Covid-19 pandemic; social distancing; asset prices; stock market (search for similar items in EconPapers)
JEL-codes: E21 G12 I19 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-mac
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