Implications of Stochastic Transmission Rates for Managing Pandemic Risks

50 Pages Posted: 26 May 2020

See all articles by Harrison G. Hong

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Neng Wang

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Jinqiang Yang

Columbia University; Shanghai University of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

The reproduction number R0 plays an outsized role in COVID-19 risk management. But it is an insufficient statistic, particularly for financial risks, because transmissions are stochastic due to environmental factors. We introduce aggregate transmission shocks into a widely-used epidemic model and link firm valuation to epidemic data by using an asset-pricing framework that accounts for potential vaccines. Pooling early data, we estimate a large R0 and transmission volatility. R0 mismeasures social-distancing benefits because it gives a poor approximation of conditional infection forecasts. R0 mismeasures financial risks since transmission volatility and vaccine news also determine firm-value damage.

Suggested Citation

Hong, Harrison G. and Wang, Neng and Yang, Jinqiang, Implications of Stochastic Transmission Rates for Managing Pandemic Risks (May 2020). NBER Working Paper No. w27218, Available at SSRN: https://ssrn.com/abstract=3609670

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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New York, NY 10027
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National Bureau of Economic Research (NBER)

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Neng Wang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jinqiang Yang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Shanghai University of Finance and Economics ( email )

Law School, 777 Guoding Road, Yangpu District
Shanghai, AK 200433
China

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