COVID-19 and the Discounting of Real Economic Activity in the US and European Stock Markets

54 Pages Posted: 24 Apr 2020 Last revised: 16 Jun 2020

See all articles by Juha-Pekka Junttila

Juha-Pekka Junttila

Jyväskylä University School of Business and Economics; Oulu Business Scool

Date Written: June 15, 2020

Abstract

We analyse how the future real economic activity is discounted to the current value of stocks in the US and European markets, and find that the extraordinary threat on future real GDP growth caused by the COVID-19 pandemic was obviously one of the main factors that affected the deep dive in the valuation of stock market assets at the beginning of crisis. However, the current seemingly booming situation in the markets can be seen as a relevant market reaction, too, because the investors’ fears of rare disasters modeled here by the nonlinear valuation effects from stock market tail risks are strongly affected by unconventional monetary policy actions. The near-term (implied) market volatility is now lower because according to our results, already since 2008 the unconventional monetary policy actions have had a strong role on the stock market valuation of future real activity through their effects on the near-term uncertainty.

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, COVID-19 and the Discounting of Real Economic Activity in the US and European Stock Markets (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3583415 or http://dx.doi.org/10.2139/ssrn.3583415

Juha-Pekka Junttila (Contact Author)

Jyväskylä University School of Business and Economics ( email )

University of Jyväskylä
PO Box 35
Jyväskylä, FIN-40014
Finland

Oulu Business Scool ( email )

PO Box 4600
FIN-90014 University of Oulu
Finland
+358-8-553 2916 (Phone)
+358-8-553 2906 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
132
Abstract Views
930
rank
243,942
PlumX Metrics