Research On Asset Pricing Based On The Impact Of The COVID-19 Pandemi

The COVID-19 has impacted the macro economy and individual enterprises,and the evolution of the epidemic and mitigation policies have profoundly shaped the current and future economic structure.The investment of firms and the consumption behavior of residents are the basis of long-term production growth.In particular,it is necessary to discuss the impact of the COVID-19 on the economy from a theoretical perspective because household consumption and corporate investment are important objects of the equilibrium framework.The important impact of the epidemic on production is that the infected population leads to a decline in the labor force participation rate.Thus,it is necessary to introduce the epidemic model into the asset pricing model.Starting from the classic starting point of asset pricing theory,that is,the problem of investor consumption,this paper analyzes implications of conditions such as the impact of the evolution of the COVID-19,mitigation policies,and vaccines in the equilibrium asset pricing framework,and then expands to the problem of corporate investment.And then I introduces production investment and consumption into general equilibrium frame simultaneously.It should be emphasized that I borrow the investment analysis from unified q theory in this article,because the q theory can also fully incorporate the irreversible characteristics of investment,which is closer to practical problems and theoretical concerns.Finally,based on q theory,consumption decisions are also taken into account in the production equilibrium economy,which is a comparison and expansion of asset pricing framework based on consumption.This paper adpot SIS model to the general Tobin’s q theory to study firm’s investment,firm value,and analyze risk-free interest rate,risk premium and asset value under equilibrium conditions.The study found that,first,the strong contagiousness of the COVID-19 will lead to a decline in interest rates and investment,but the expectation of vaccine is conducive to hedging this shock.Second,firms have a call option on the uncertainty of COVID-19 infection,and the high volatility in infection rates leads to the higher levels of corporate investment.Third,firms with high adjustment costs will magnify the loss of firm value during the epidemic,while the firm with low adjustment costs will implement the mitigation policy more actively.The main work of this paper is as follows:(1)Based on the standard Merton’s portfolio theory,this paper incorporates the stochastic SIS model into a pure exchange economy.We explore the optimal rules with respect to infection rate for an agent during the pandemic regime.The results demonstrate that infectivity mainly affects consumption.The innovative attempt of this paper not only enriches the research of epidemiology in the field of economics,but also provides a paradigm for studying investor’s behavior under the background of normalized situation of epidemic prevention.The theoretical results confirm why so many countries affected by the epidemic have adopted low or even negative interest rate monetary policies to stimulate consumption and boost the economy.This paper also provides evidence to explain why the risk premium of capital market increases with the rapid spread of COVID-19.Notably,our model authenticates that vaccination is beneficial to smooth interest rate and to curb the soaring systemic risk.These results provide a theoretical guidance for social planer’s interest policy and investors’ capital market investment in the post epidemic era.(2)This paper analyze the impact of COVID-19 on investment by incorporating a stochastic transmission shock into the standard q theoretical framework.Our model suggests that the adjustment cost amplifies the negative pandemic shock to investment and increases firm value.In particular,when the infection rate is low,the investment will decline more for the firm with low adjustment costs because that they are more sensitive to the infection rate.An optimistic expectation of the arrival rate of a vaccine reduces the probability of executing mitigation policy.Moreover,the uncertainty of the pandemic increases investment and enhances firm value during the pandemic regime.(3)This paper introduces the SIS epidemic model into a production-based economy.We study the asset pricing implications of the interaction between COVID-19’s shock and mitigation policy for the production economy.The mitigation policy could hinder the consumption,while it will prompt an investment slump.The results indicate some trade-offs between mitigating the transmission of the pandemic and economic output varying with different uncertainty of the infection increment.Notably,the risk premium and growth of capital value present an inverse humpshape with the infection rate.Furthermore,I find that the intertemporal elasticity of substitution does not affect capital values,but only the allocation among portfolio decisions.