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Implications of Stochastic Transmission Rates for Managing Pandemic Risks
[Comparison of deterministic and stochastic SIS and SIR models in discrete time]

Author

Listed:
  • Harrison Hong
  • Neng Wang
  • Jinqiang Yang

Abstract

We introduce aggregate transmission shocks to an epidemic model and link firm valuations to infections via an asset pricing framework with vaccines. Infections lower earnings growth but firms can mitigate damages. We estimate a large reproduction numberand transmission volatility for COVID-19. Using these estimates, we quantify the bias of deterministic approximations based on . Our model generates predictions consistent with the data: unexpected infection resurgence, nonmonotonic 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, 2021. "Implications of Stochastic Transmission Rates for Managing Pandemic Risks [Comparison of deterministic and stochastic SIS and SIR models in discrete time]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5224-5265.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:11:p:5224-5265.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa132
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    Citations

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    Cited by:

    1. Davide Torre & Simone Marsiglio & Franklin Mendivil & Fabio Privileggi, 2024. "Stochastic disease spreading and containment policies under state-dependent probabilities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 77(1), pages 127-168, February.
    2. Li, Shilin & Li, Tongtong & Yang, Jinqiang, 2022. "Optimal consumption and portfolio choices in the stochastic SIS model," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    3. Itay Goldstein & Ralph S J Koijen & Holger M Mueller, 2021. "COVID-19 and Its Impact on Financial Markets and the Real Economy [A model of endogenous risk intolerance and LSAPs: Asset prices and aggregate demand in a “COVID-19” shock]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5135-5148.
    4. Rouatbi, Wael & Demir, Ender & Kizys, Renatas & Zaremba, Adam, 2021. "Immunizing markets against the pandemic: COVID-19 vaccinations and stock volatility around the world," International Review of Financial Analysis, Elsevier, vol. 77(C).
    5. Lorena Skufi & Adam Geršl, 2023. "Using Macrofinancial Models to Simulate Macroeconomic Developments During the COVID-19 Pandemic: The Case of Albania," Eastern European Economics, Taylor & Francis Journals, vol. 61(5), pages 517-553, September.
    6. Oleg Kucher & Alexander Kurov & Marketa Halova Wolfe, 2023. "A shot in the arm: The effect of COVID‐19 vaccine news on financial and commodity markets," The Financial Review, Eastern Finance Association, vol. 58(3), pages 575-596, August.
    7. Yao, Yanming & Luo, Pengfei, 2023. "Optimal capital structure and credit spreads under pandemic shocks," Economics Letters, Elsevier, vol. 224(C).
    8. repec:hal:journl:hal-04790588 is not listed on IDEAS
    9. Yu, Xiaoling & Xiao, Kaitian, 2023. "COVID-19 Government restriction policy, COVID-19 vaccination and stock markets: Evidence from a global perspective," Finance Research Letters, Elsevier, vol. 53(C).
    10. Björn Bos & Moritz A. Drupp & Jasper N. Meya & Martin F. Quaas, 2023. "Financial Risk-Taking under Health Risk," CESifo Working Paper Series 10387, CESifo.
    11. repec:hal:journl:hal-04804492 is not listed on IDEAS
    12. Martins, António Miguel & Cró, Susana, 2022. "Airline stock markets reaction to the COVID-19 outbreak and vaccines: An event study," Journal of Air Transport Management, Elsevier, vol. 105(C).
    13. Li, Shilin & Li, Tongtong & Yang, Jinqiang & Zhao, Siqi, 2021. "Tobin’s q and corporate investment with a pandemic shock," Economics Letters, Elsevier, vol. 209(C).
    14. Park, Dojoon & Kang, Yong Joo & Eom, Young Ho, 2024. "Asset pricing tests for pandemic risk," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1314-1334.

    More about this item

    JEL classification:

    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • G01 - Financial Economics - - General - - - Financial Crises
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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