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 June 2020
NBER Program(s):Asset Pricing, Health Economics, Public Economics

The reproduction number R0 plays an outsized role in COVID-19 risk management. But it is an insufficient statistic, particularly for financial risks, because transmissions are stochastic due to environmental factors. We introduce aggregate transmission shocks into a widely-used epidemic model and link firm valuation to epidemic data by using an asset-pricing framework that accounts for potential vaccines. Pooling early data, we estimate a large R0 and transmission volatility. R0 mismeasures social-distancing benefits because it gives a poor approximation of conditional infection forecasts. R0 mismeasures financial risks since transmission volatility and vaccine news also determine firm-value damage.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w27218