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Asset pricing tests for pandemic risk

Author

Listed:
  • Park, Dojoon
  • Kang, Yong Joo
  • Eom, Young Ho

Abstract

This study examines the relationship between the COVID-19 pandemic and stock returns. We find that pandemic risk is a significant determinant of cross-sectional stock returns. The time-varying effective reproduction number from the susceptible-infectious-recovered epidemic model is introduced as a proxy measure for COVID-19 risk. The two-step generalized method of moments estimation results indicate that the COVID-19 factor commands a significant positive risk premium. The results are robust to different test assets, serial interval parameters, portfolio construction methods and alternative proxy measures, providing strong empirical evidence that the COVID-19 factor is a priced risk factor during the COVID-19 pandemic.

Suggested Citation

  • Park, Dojoon & Kang, Yong Joo & Eom, Young Ho, 2024. "Asset pricing tests for pandemic risk," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1314-1334.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:1314-1334
    DOI: 10.1016/j.iref.2023.08.014
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    More about this item

    Keywords

    Asset pricing; COVID-19; Pandemic risk; Reproduction number;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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