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

Abstract

We show that unexpected changes in the trajectory of COVID-19 infections predict US stock returns, in real time. Parameter estimates indicate that an unanticipated doubling (halving) of projected infections forecasts next-day decreases (increases) in aggregate US 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.

Pandemic Lockdown: The Role of Government Commitment

“…Related literature. This paper relates to the nascent literature on optimal policy in a pandemic, with recent contributions by Acemoglu et al (2020), Alfaro et al (2020), Alvarez et al (2020), 3 New York Governor Andrew Cuomo announced at his daily New York coronavirus press conference on May 4, 2020: "As long as your rate of transmission is manageable and low, then reopen your businesses and reopen the businesses in phases, so you're increasing that activity level while you're watching the rate of transmission. Rate of transmission goes up, stop the reopening, close the valve, close the valve right away.…”

“…2 See Acemoglu et al (2020), Alfaro et al (2020), Alvarez et al (2020), Atkeson (2020a,b), Baqaee and Farhi (2020a,b), Berger et al (2020), Birinci et al (2020), Chari et al (2020), Craig and Hines (2020), Eichenbaum et al (2020a,b), Fang et al (2020), Farboodi et al (2020), Glover et al (2020), Gregory et al (2020), Jones et al (2020), Kaplan et al (2020), Krueger et al (2020), and Piguillem and Shi (2020), among others. policies during a pandemic.…”

Earnings Expectations in the COVID Crisis

“…Ramelli and Wagner (2020) and Ding et al (2020) study in detail how firm-level characteristics such as leverage, cash-holdings, supply-chain and industry affect the cross-section of returns. Alfaro et al (2020) show how unanticipated changes in predicted infections forecast aggregate equity market returns. Albuquerque et al (2020) find a positive correlation between ESG ratings and abnormal returns through the crisis.…”

The Impact of the COVID-19 Pandemic on Business Expectations

“…https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200729.pdf 2 Based on a new big data index developed by Brave, Butters and Kelley (2019), Li and Sheng (2020) identify COVIDinduced recession beginning in March 2020. Indeed, high-frequency data on small firm closings and activity from HomeBase (https://joinhomebase.com/blog/real-time-covid-19-data/), as well as high-frequency data from Opportunity Insights (https://tracktherecovery.org/) described in Chetty et al (2020) point to a sharp contraction in activity beginning in mid-March 3. Lael Brainard.…”