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Disaster Resilience and Asset Prices

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  • Zechner, Josef
  • Pagano, Marco
  • Wagner, Christian

Abstract

This paper investigates whether the stock market prices the effect of social dis- tancing on firms' operations. We document that firms that are more resilient to social distancing signifcantly outperformed those with lower resilience during the COVID-19 outbreak, even after controlling for the standard risk factors. Similar cross-sectional return differentials already emerged before the COVID- 19 crisis: the 2014-19 cumulative return differential between more and less resilient firms is of similar size as during the outbreak, suggesting growing awareness of pandemic risk well in advance of its materialization. Finally, we use stock option prices to infer the market's return expectations after the onset of the pandemic: even at a two-year horizon, stocks of more pandemic-resilient firms are expected to yield signifcantly lower returns than less resilient ones, reflecting their lower exposure to disaster risk. Hence, going forward, markets appear to price exposure to a new risk factor, namely, pandemic risk.

Suggested Citation

  • Zechner, Josef & Pagano, Marco & Wagner, Christian, 2020. "Disaster Resilience and Asset Prices," CEPR Discussion Papers 14773, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14773
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    More about this item

    Keywords

    Asset pricing; Rare disasters; Social distance; Resilience; Pandemics;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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