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

See all articles by Nusret Cakici

Nusret Cakici

Fordham university

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business; University of Cape Town

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

Cakici, Nusret and Zaremba, Adam, Who Should be Afraid of Infections? Pandemic Exposure and the Cross-Section of Stock Returns (May 19, 2020). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3605878 or http://dx.doi.org/10.2139/ssrn.3605878

Nusret Cakici

Fordham university ( email )

113 West 60th Street
New York, NY 10023
United States
2017473227 (Phone)
07446 (Fax)

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

HOME PAGE: http://sites.google.com/view/adamzaremba

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

University of Cape Town

Cape Town
South Africa

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