What the stock market tells us about the consequences of COVID-19

摘要： The novel coronavirus represents a fearsome risk which is stirring feverish behaviour by investors worldwide. This column shows that initially, economic expectations about international trade underlay movements in the stock prices of individual firms; later, concerns about corporate debt began to play a role.

The outbreak of the novel coronavirus (COVID-19) will go down in history as a major example of a neglected risk. The topic “infectious diseases” was ranked tenth in terms of impact in the World Economic Forum’s Global Risk Report 2020 (WEF 2020, published on 15 January 2020), but was considered quite unlikely. The attention of corporate decision makers and politicians was mainly focused on traditional sources of business risk and pressing environmental issues. Only a few weeks later, however, their attention shifted dramatically.

According to the World Health Organization (WHO), by 10 March 2020, COVID-19 had led to more than 110,000 confirmed infections and 4,015 deaths in 110 countries – and the numbers are increasing rapidly. Huge disruptions to personal lives are taking place, including curfews (or situations resembling curfews) for a great many individuals. Beyond the immediate tragedies of death and disease, indirect effects through fear are taking hold of an uncountable number of people around the world.

In light of the massive impacts of the coronavirus on public physical and psychological health, the economic and financial impacts may seem secondary. However, the economic effects are potentially going to be of first-order importance. Economists are beginning to consider these consequences (see in particular the latest Vox eBook edited by Baldwin and Weder di Mauro 2020). Earlier work also provides valuable insights. For example, Adda (2006) analyses outbreaks of a number of viral diseases in France and evaluates the (sometimes subtle) effects of policies such as school closures and the closure of public transportation networks. Ultimately, predictions are difficult because the spread of the disease, the policy responses, and individual behaviour are unknown.

An important tool for understanding the consequences of events like the emergence of COVID-19 is to consider asset price changes. These price changes capture current expectations. Thus, the researcher need not trace all the future changes to cash flows and discount rates separately (Schwert 1981). Effectively, asset markets provide ongoing, high-stakes surveys regarding future expected outcomes.

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