Download This PaperResilience and Asset Pricing in COVID-19 Disaster
48 Pages Posted: 15 Dec 2022 Last revised: 11 Feb 2024
Date Written: November 29, 2022
Abstract
This paper develops a rare disaster asset pricing model with EZ preferences, in particular including the impact of macroeconomic consequences of the COVID-19 disaster. I estimate the probability of disaster, disaster states, and the duration of disaster to shed light on the frequency and size of this disaster and to obtain the macroeconomic sensitivity to COVID-19 as well as its impact on dividend growth. Clearly, more workplace-flexible firms have better functionality during COVID-19; However, it is important to figure out to what extent financial strength of firms can affect the degree of their workplace resilience in such crisis. The novel empirical results of dynamic functional principal component analysis suggest the significant amplification of random effect of workplace resilience by firms' financial resilience. The estimated dividend growth highlights that the effect of workplace resilience is dominant although the impact of firms' financial resilience is statistically significant. Specifically, I show that the dividend growth of low-resilience firms are significantly more elastic to workplace resilience and suffer more severely than that of the high-resiliences. I show that not only the proposed model delivers tractable asset pricing formulas but also the framework can rationalize the market pattern and the model-based equity premium is increasing in probability of disaster.
Keywords: Financial resilience, workplace resilience, dynamic functional principal component, Markov-Switching, COVID-19 disaster
JEL Classification: C23, C24, C38, G11, G12, Q51, Q54
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