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    Aggregate and Firm-Level Stock Returns During Pandemics, in Real Time
    09 Jun 2020Working Paper Summaries

    Aggregate and Firm-Level Stock Returns During Pandemics, in Real Time

    by Laura Alfaro, Anusha Chari, Andrew Greenland, and Peter K. Schott
    This paper explains the seemingly conflicting narratives from the stock and labor market about the underlying state of the economy. We show that day-to-day changes in the predictions of standard models of infectious disease forecast changes in aggregate stock returns in pandemics.
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    Author Abstract

    We show that unexpected changes in the trajectory of COVID-19 infections predict U.S. stock returns, in real time. Parameter estimates indicate that an unanticipated doubling (halving) of projected infections forecasts next-day decreases (increases) in aggregate U.S. market value of 4 to 11 percent, indicating that equity markets may begin to rebound even as infections continue to rise, if the trajectory of the disease becomes less severe than initially anticipated. Using the same variation in unanticipated projected cases, we find that COVID-19-related losses in market value at the firm level rise with capital intensity and leverage, and are deeper in industries more conducive to disease transmission. These relationships provide important insight into current record job losses. Measuring US states' drops in market value as the employment weighted average declines of the industries they produce, we find that states with milder drops in market value exhibit larger initial jobless claims per worker. This initially counter-intuitive result suggests that investors value the relative ease with which labor versus capital costs can be shed as revenues decline.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: May 2020
    • HBS Working Paper Number: NBER Working Paper Series, No. 26950
    • Faculty Unit(s): General Management
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    Laura Alfaro
    Laura Alfaro
    Warren Alpert Professor of Business Administration
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