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Globally Dangerous Diseases: Bad News for Main Street, Good News for Wall Street?

41 Pages Posted: 6 Dec 2016  

Michael Donadelli

Goethe University Frankfurt - Research Center SAFE

Renatas Kizys

Portsmouth Business School

Max Riedel

Goethe University Frankfurt - Research Center SAFE

Date Written: December 6, 2016

Abstract

This paper examines whether investor mood, driven by World Health Organization (WHO) alerts and media news on globally dangerous diseases, is priced in pharmaceutical companies' stocks in the United States. We concentrate on irrational investors who buy and sell pharmaceutical companies' stocks guided by beliefs as opposed to rational expectations. We argue that disease-related news (DRNs) should not trigger rational trading. We find that DRNs have a positive and significant sentiment effect among investors (on Wall Street). The effect is stronger (weaker) for small (large) companies, who are less (more) likely to engage in the development of new vaccines in the wake of DRNs. A potential negative mood (on Main Street) – induced by disease related fear – does not alter the positive sentiment effect. Our findings give rise to profitable trading strategies leading to significantly positive performances. Overall, this unparalleled research shows that large events of devastating nature to the economy can be considered as good news to some groups of interest, such as stock market traders.

Keywords: WHO alerts, investor sentiment, pharmaceutical industry, trading strategies

JEL Classification: G11, G14, I11

Suggested Citation

Donadelli, Michael and Kizys, Renatas and Riedel, Max, Globally Dangerous Diseases: Bad News for Main Street, Good News for Wall Street? (December 6, 2016). SAFE Working Paper No. 158. Available at SSRN: https://ssrn.com/abstract=2881220

Michael Donadelli (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Renatas Kizys

Portsmouth Business School ( email )

Portsmouth, PO1 3DE
United Kingdom

Max Riedel

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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