The Value of a Cure: An Asset Pricing Perspective

Abstract

We estimate the value of ending a pandemic using the joint behavior of stock prices and a vaccine progress indicator during 2020. In a general equilibrium model, the observed market response to vaccine progress serves to identify the expected rate of loss of wealth during the pandemic, which pins down the economy-wide welfare gain attributable to a cure. With standard preference parameters, ending the pandemic is worth 5-15% of total wealth. This value rises with greater exposure externality in labor choice. With uncertainty about pandemic frequency and duration, resolving the uncertainty can be as valuable as the cure itself.

Keywords: pandemic, vaccine, COVID-19, rare disasters, regime-switching, parameter uncertainty

JEL Classification: G12, D5, I1, Q54