The Cyber Risk Premium

46 Pages Posted: 15 Jul 2020 Last revised: 10 Jul 2022

See all articles by Hao Jiang

Hao Jiang

Michigan State University

Naveen Khanna

Michigan State University

Qian Yang

Michigan State University

Jiayu Zhou

Michigan State University - Department of Computer Science and Engineering

Date Written: June 28, 2020

Abstract

Cyber risk is an important but latent 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 individ- ual firms. We find that firms with higher cyber risk earn higher average stock returns, which cannot be explained by standard asset pricing models. When these firms under- perform, cybersecurity experts tend to have higher concerns about cyber risk and the cybersecurity exchange-traded funds outperform.

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

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). Available at SSRN: https://ssrn.com/abstract=3637142 or http://dx.doi.org/10.2139/ssrn.3637142

Hao Jiang

Michigan State University ( email )

315 Eppley Center
Department of Finance
East Lansing, MI 48824
United States

HOME PAGE: http://sites.google.com/site/haojiangfinance/

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)

Michigan State University ( email )

MI 48823
United States

Jiayu Zhou

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

East Lansing, MI
United States

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