Implications of Stochastic Transmission Rates for Managing Pandemic Risks

Hong, Harrison; Wang, Neng; Yang, Jinqiang

We introduce aggregate transmission shocks to an epidemic model and link firm valuations to infections via an asset pricing framework with vaccines. Infections lower earnings growth but firms can mitigate damages. We estimate a large reproduction number [Formula: see text] and transmission volatility for COVID-19. Using these estimates, we quantify the bias of deterministic approximations based on [Formula: see text]. Our model generates predictions consistent with the data: unexpected infection resurgence, nonmonotonic mitigation policies, and higher price-to-earnings ratios during a pandemic. Valuations would be significantly lower absent mitigation and a high vaccine arrival rate.