Pricing and Hedging Cybercrime News
72 Pages Posted: 22 Dec 2022 Last revised: 1 Nov 2024
Date Written: December 11, 2022
Abstract
We measure stock cybercrime risk using betas from cybercrime news coverage. Stocks with higher cybercrime sensitivity -- indicated by their betas -- demand lower risk-adjusted returns, implying a negative risk premium for assets hedging against cybercrime fluctuations. Our analysis of 112 significant incidents supports a long-short portfolio strategy that effectively mitigates cybercrime exposure. We pinpoint critical determinants of firms' cybercrime betas, emphasizing the protective roles of corporate governance, human capital, limited industry-wide cyber interactions, and minimal data-centric operations. Our asset pricing results estimate cybercrime-related losses range from $40 to $140 billion, with our hedging strategy potentially averting up to $86 billion annually.
Keywords: Hedging Cybercrime, Corporate Governance, Industry Peers, Digitization, IT Investment
JEL Classification: G11, G12, C13, E20
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