The Cyber Risk Premium

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