Ambiguity in a Pandemic Recession, Asset Prices, and Lockdown Policy

37 Pages Posted: 5 Aug 2021 Last revised: 18 Mar 2022

See all articles by Keiichi Morimoto

Keiichi Morimoto

Meiji University - School of Political Science and Economics

Shiba Suzuki

Seikei University - Faculty of Economics

Date Written: March 17, 2022

Abstract

Using an asset pricing model of a multisector production economy including pandemic disaster, we explain the average stock price boom and significant cross-sectional variation of stock returns in the US and Japan during the COVID-19 pandemic recession. We find that two features of the pandemic, namely ambiguity and sector-specific shocks, are critical determinants of the unusual asset price dynamics observed. Extending the model, we analyze the welfare effects of lockdown policy during pandemics for heterogeneous households. We theoretically show that enforcing a lockdown improves the welfare of asset holders and households working in sectors with positive sector-specific shocks. Consequently, a Pareto-optimal lock- down policy controls for the tightness of lockdown to maximize the welfare of households working in sectors with negative sector-specific shocks.

Keywords: Ambiguity, Asset prices, COVID-19, Heterogeneous agents, Welfare

JEL Classification: D81, D53, E44, G12, H12

Suggested Citation

Morimoto, Keiichi and Suzuki, Shiba, Ambiguity in a Pandemic Recession, Asset Prices, and Lockdown Policy (March 17, 2022). Available at SSRN: https://ssrn.com/abstract=3896828 or http://dx.doi.org/10.2139/ssrn.3896828

Keiichi Morimoto

Meiji University - School of Political Science and Economics ( email )

1-1 Kanda-Surugadai
Chiyoda-ku, Tokyo 101-8301
Japan

HOME PAGE: http://https://sites.google.com/view/kmorimoto

Shiba Suzuki (Contact Author)

Seikei University - Faculty of Economics ( email )

3-3-1, Kichijoji-Kitamachi
Musashino-shi, Tokyo 180-8633
Japan

HOME PAGE: http://sites.google.com/site/suzukishiba1031/home

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