The Cyber Risk Premium

Forthcoming, Management Science

57 Pages Posted: 15 Jul 2020 Last revised: 30 Aug 2023

See all articles by Hao Jiang

Hao Jiang

Michigan State University - Eli Broad College of Business

Naveen Khanna

Michigan State University

Qian Yang

McMaster University

Jiayu Zhou

Michigan State University - Department of Computer Science and Engineering

Date Written: June 28, 2020

Abstract

Cyber risk is an important, emerging source of risk in the economy. To estimate its impact on the asset market, we use machine learning techniques to develop a firm-level measure of cyber risk. The measure aggregates information from a rich set of firm characteristics and shows superior ability to forecast future cyberattacks on individual firms. We find that firms with higher cyber risk earn higher average stock returns. When these firms underperform, cybersecurity experts tend to have higher concerns about cyber risk, and cybersecurity exchange-traded funds outperform. Further tests strengthen the identification of the cyber risk premium.

Keywords: Cyber risk, Cybersecurity, Risk premium, Machine learning

JEL Classification: G11, G12, G14, G17

Suggested Citation

Jiang, Hao and Khanna, Naveen and Yang, Qian and Zhou, Jiayu, The Cyber Risk Premium (June 28, 2020). Forthcoming, Management Science, Available at SSRN: https://ssrn.com/abstract=3637142 or http://dx.doi.org/10.2139/ssrn.3637142

Hao Jiang

Michigan State University - Eli Broad College of Business ( email )

632 Bogue St
East Lansing, MI 48824
United States

Naveen Khanna

Michigan State University ( email )

East Lansing, MI 48824-1121
United States
517-353-1853 (Phone)
517-432-1080 (Fax)

Qian Yang (Contact Author)

McMaster University ( email )

Ontario L8S 4L8
Canada

Jiayu Zhou

Michigan State University - Department of Computer Science and Engineering ( email )

East Lansing, MI
United States

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