Implications of Stochastic Transmission Rates for Managing Pandemic Risks

Harrison Hong, Neng Wang, Jinqiang Yang

NBER Working Paper No. 27218
Issued in May 2020, Revised in September 2020
NBER Program(s):Asset Pricing, Health Economics, Public Economics

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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w27218