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Why a Pandemic Recession Boosts Asset Prices

Resource type
Date created
2021-02-03
Authors/Contributors
Abstract
Economic recessions are traditionally associated with asset price declines, and recoveries with asset price booms. Standard asset pricing models make sense of this: during a recession, dividends are low and the marginal value of income is high, causing low asset prices. Here, I develop a simple model which shows that this is not true during a recession caused by consumption restrictions, such as those seen during the 2020 pandemic: the restrictions drive the marginal value of income down, and thereby drive asset prices up, to an extent that tends to overwhelm the effect of low dividends. This result holds even if investors misperceive the economic forces at work.
Description
The full text of this paper will be available in February, 2023 due to the embargo policies of Journal of Mathematical Economics. Contact summit@sfu.ca to enquire if the full text of the accepted manuscript can be made available to you.
Copyright statement
Copyright is held by the author(s).
Scholarly level
Peer reviewed?
Yes
Language
English
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