Abstract
This study examines the relationship between the COVID-19 pandemic and stock returns. We find that pandemic risk is a significant determinant of cross-sectional stock returns. The time-varying effective reproduction number from the susceptible-infectious-recovered epidemic model is introduced as a proxy measure for COVID-19 risk. The two-step generalized method of moments estimation results indicate that the COVID-19 factor commands a significant positive risk premium. The results are robust to different test assets, serial interval parameters, portfolio construction methods and alternative proxy measures, providing strong empirical evidence that the COVID-19 factor is a priced risk factor during the COVID-19 pandemic.
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