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Implications of Stochastic Transmission Rates for Managing Pandemic Risks

Author

Listed:
  • Harrison Hong
  • Neng Wang
  • Jinqiang Yang

Abstract

We develop a model of pandemic risk management and firm valuation. We introduce aggregate transmission shocks into an epidemic model and link valuations to infections via an asset-pricing framework with vaccines. Infections lower earnings growth but firms can mitigate damages. We estimate a large reproduction number R0 and transmission volatility for COVID-19. Using these estimates, we assess the accuracy of deterministic approximations based on R0. Our model generates predictions consistent with data: unexpected infection resurgence, non-monotonic mitigation policies, and higher price-to-earnings ratios during a pandemic. Valuations would be significantly lower absent mitigation and a high vaccine arrival rate.

Suggested Citation

  • Harrison Hong & Neng Wang & Jinqiang Yang, 2020. "Implications of Stochastic Transmission Rates for Managing Pandemic Risks," NBER Working Papers 27218, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27218
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    References listed on IDEAS

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    Cited by:

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    2. Jean-Paul Renne & Guillaume Roussellet & Gustavo Schwenkler, 2020. "Preventing COVID-19 Fatalities: State versus Federal Policies," Papers 2010.15263, arXiv.org, revised Dec 2020.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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