Implications of Stochastic Transmission Rates for Managing Pandemic Risks
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.
Document Object Identifier (DOI): 10.3386/w27218