COVID-19 and the Discounting of Real Economic Activity in the U.S. and European Stock Markets

36 Pages Posted: 24 Apr 2020 Last revised: 27 Jan 2021

See all articles by Juha-Pekka Junttila

Juha-Pekka Junttila

University of Jyväskylä - Jyväskylä International Macro & Finance Research Group (JyIMaF)

Vance L. Martin

University of Melbourne - Department of Economics; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: January 27, 2021

Abstract

Using an extended version of the Gordon dividend discount model, the large falls in the U.S. and European stock market assets at the beginning of the COVID-19 pandemic are found to be the result of pricing expected future falls in real economic activity caused by the global shock. The subsequent boom in asset markets and reductions in volatility immediately following this initial fall in stock prices are caused by a strong connection of the central banks' balance sheet extension to the near-term stock market uncertainty. This connection of unconventional monetary policy actions is strongly priced in the U.S. and European markets.

Keywords: COVID-19, discounting, stock markets, macro factors, rare disasters, tail risk, unconventional monetary policy

JEL Classification: C54, C58, E32, E44, E58, G01, G12

Suggested Citation

Junttila, Juha-Pekka and Martin, Vance L., COVID-19 and the Discounting of Real Economic Activity in the U.S. and European Stock Markets (January 27, 2021). Available at SSRN: https://ssrn.com/abstract=3583415 or http://dx.doi.org/10.2139/ssrn.3583415

Juha-Pekka Junttila (Contact Author)

University of Jyväskylä - Jyväskylä International Macro & Finance Research Group (JyIMaF) ( email )

PO Box 35
Jyväskylä
Finland

Vance L. Martin

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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