Disaster Resilience and Asset Prices

43 Pages Posted: 28 May 2020

See all articles by Marco Pagano

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Christian Wagner

WU Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Josef Zechner

Vienna University of Economics and Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

This paper investigates whether the stock market prices the effect of social distancing on firms' operations. We document that firms that are more resilient to social distancing significantly outperformed those with lower resilience during the COVID-19 outbreak, even after controlling for the standard risk factors. Similar cross-sectional return differentials already emerged before the COVID-19 crisis: the 2014-19 cumulative return differential between more and less resilient firms is of similar size as during the outbreak, suggesting growing awareness of pandemic risk well in advance of its materialization. Finally, we use stock option prices to infer the market's return expectations after the onset of the pandemic: even at a two-year horizon, stocks of more pandemic-resilient firms are expected to yield significantly lower returns than less resilient ones, reflecting their lower exposure to disaster risk. Hence, going forward, markets appear to price exposure to a new risk factor, namely, pandemic risk.

Keywords: Asset Pricing, Pandemics, Rare Disasters, resilience, social distance

JEL Classification: G01, G11, G12, G13, G14, Q51, Q54

Suggested Citation

Pagano, Marco and Wagner, Christian and Zechner, Josef, Disaster Resilience and Asset Prices (May 2020). CEPR Discussion Paper No. DP14773, Available at SSRN: https://ssrn.com/abstract=3612841

Marco Pagano (Contact Author)

University of Naples Federico II - Department of Economics and Statistics ( email )

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Centre for Studies in Economics and Finance (CSEF) ( email )

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Einaudi Institute for Economics and Finance (EIEF)

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Research Institute of Industrial Economics (IFN)

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Christian Wagner

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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