Who Should be Afraid of Infections? Pandemic Exposure and the Cross-Section of Stock Returns
57 Pages Posted: 20 May 2020 Last revised: 15 Mar 2021
Date Written: May 19, 2020
Abstract
Does past stock price reaction to pandemics contain information about future returns? To answer this, we estimate firm exposure to a pandemic index representing global concerns of infectious diseases. We demonstrate that such a pandemic beta reliably predicts the cross-section of future stock returns. The highest pandemic beta decile outperforms the lowest pandemic beta decile by about 1% per month on a risk-adjusted basis. The effect is not explained by well-known return predictors and is robust to many considerations. Our findings indicate that investors do not correctly price information stemming from firms’ reactions to pandemics.
Keywords: pandemic, epidemic, COVID-19, novel coronavirus, pandemic index, asset pricing, the cross-section of stock returns, return predictability
JEL Classification: G12, G15
Suggested Citation: Suggested Citation