Does the Stock Market reflect the Long-Run Effects of COVID-19?

Orientador(a): Walter Novaes

The existing literature on the effects of Covid on stock returns focuses on endogenous changes in risk tolerance and on the modeling of rare events. So far, these attempts have not been able to match the data. In this paper, I propose an alternative approach to explaining the Covid effects on stock returns worldwide: disentangling the long-run effects from the short-run effects. Intuitively, Covid’s long-run effects include disruptions of supply chains and educational patterns, which, conceivably, will take time to phase out. Exactly as it happens with the persistent shocks of long-run risks models! A model that allows for short-run fluctuations and long-run risk shows that persistent shocks play a role in explaining stock market returns and exchange rates in a time span that starts in January 2018 and ends in November 2021.