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Ambiguity in a pandemic recession, asset prices, and lockdown policy

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  • Keiichi Morimoto
  • Shiba Suzuki

Abstract

Using an asset pricing model of a multisector production economy including pandemic disaster, we explain the average stock price boom and significant cross‐sectional variation of stock returns in the United States and Japan during the COVID‐19 pandemic recession. We find that two features of the pandemic, namely ambiguity and sector‐specific shocks, are critical determinants of the unusual asset price dynamics observed. Extending the model, we analyze the welfare effects of lockdown policy during pandemics for heterogeneous households. We theoretically show that enforcing a lockdown improves the welfare of asset holders and households working in sectors with positive sector‐specific shocks. Consequently, a Pareto‐optimal lockdown policy controls for the tightness of lockdown to maximize the welfare of households working in sectors with negative sector‐specific shocks.

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  • Keiichi Morimoto & Shiba Suzuki, 2022. "Ambiguity in a pandemic recession, asset prices, and lockdown policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(5), pages 1039-1070, October.
    • Handle: RePEc:bla:jpbect:v:24:y:2022:i:5:p:1039-1070
    DOI: 10.1111/jpet.12591
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    Cited by:

    1. Terrence Iverson & Larry Karp & Alessandro Peri, 2022. "Optimal social distancing and the economics of uncertain vaccine arrival," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(5), pages 1071-1100, October.
    2. Rabah Amir & Raouf Boucekkine, 2022. "Introduction to the special issue on new insights into economic epidemiology: Theory and policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(5), pages 861-872, October.

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