The Value of a Cure: An Asset Pricing Perspective / Viral V. Acharya, Timothy Johnson, Suresh Sundaresan, Steven Zheng.

Format:

Book

Author/Creator:

Acharya, Viral V.

Contributor:

National Bureau of Economic Research.

Johnson, Timothy.

Sundaresan, Suresh.

Zheng, Steven.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28127.

NBER working paper series no. w28127

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

We provide an estimate of the value of a cure using the joint behavior of stock prices and a vaccine progress indicator during the ongoing COVID-19 pandemic. Our indicator is based on the chronology of stage-by-stage progress of individual vaccines and related news. We construct a general equilibrium regime-switching model of repeated pandemics and stages of vaccine progress wherein the representative agent withdraws labor and alters consumption endogenously to mitigate health risk. The value of a cure in the resulting asset-pricing framework is intimately linked to the relative labor supply across states. The observed stock market response to vaccine progress serves to identify this quantity, allowing us to use the model to estimate the economy-wide welfare gain that would be attributable to a cure. In our estimation, and with standard preference parameters, the value of the ability to end the pandemic is worth 5-15% of total wealth. This value rises substantially when there is uncertainty about the frequency and duration of pandemics. Agents place almost as much value on the ability to resolve the uncertainty as they do on the value of the cure itself. This effect is stronger - not weaker - when agents have a preference for later resolution of uncertainty. The policy implication is that understanding the fundamental biological and social determinants of future pandemics may be as important as resolving the immediate crisis.

Notes:

Print version record

November 2020.