Coronavirus: Impact on Stock Prices and Growth Expectations

35 Pages Posted: 17 Mar 2020 Last revised: 26 May 2020

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: May 23, 2020

Abstract

We use data from the aggregate stock market and dividend futures to quantify how in- vestors’ expectations about economic growth across horizons evolve in response to the coro- navirus outbreak and subsequent policy responses until May 2020. Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to di- rectly compute a lower bound on growth expectations across maturities or to estimate expected growth using a forecasting model. We show how the actual forecast and the bound evolve over time. As of May 12, our forecast of annual growth in dividends is down 16% in the US and 23% in the EU compared to January 1, and our forecast of GDP growth is down by 3.6% in the US and 5.0% in the EU. The lower bound on the change in expected dividends is -29% in the US and -38% in the EU at the 2-year horizon. News about fiscal stimulus around March 24 boosts the stock market and long-term growth but did little to increase short-term growth expectations. Expected dividend growth has improved since April 1 in both the US and the EU. We show how data on dividend futures can be used to understand why stock markets fell so sharply initially, well beyond changes in growth expectations.

Suggested Citation

Gormsen, Niels Joachim and Koijen, Ralph S. J., Coronavirus: Impact on Stock Prices and Growth Expectations (May 23, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-22. Available at SSRN: https://ssrn.com/abstract=3555917 or http://dx.doi.org/10.2139/ssrn.3555917

Niels Joachim Gormsen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Ralph S. J. Koijen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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