Discussion paper

DP15558 The Value of a Cure: An Asset Pricing Perspective

We provide an estimate of the value of a cure using the joint behavior of stock prices
and a vaccine progress indicator during the ongoing COVID-19 pandemic. Our indicator
is based on the chronology of stage-by-stage progress of individual vaccines and
related news. We construct a general equilibrium regime-switching model of repeated
pandemics and stages of vaccine progress wherein the representative agent withdraws
labor and alters consumption endogenously to mitigate health risk. The value of a cure
in the resulting asset-pricing framework is intimately linked to the relative labor supply
across states. The observed stock market response to vaccine progress serves to
identify this quantity, allowing us to use the model to estimate the economy-wide welfare
gain that would be attributable to a cure. In our estimation, and with standard
preference parameters, the value of the ability to end the pandemic is worth 5-15%
of total wealth. This value rises substantially when there is uncertainty about the frequency
and duration of pandemics. Agents place almost as much value on the ability
to resolve the uncertainty as they do on the value of the cure itself. This effect is
stronger – not weaker – when agents have a preference for later resolution of uncertainty.
The policy implication is that understanding the fundamental biological and
social determinants of future pandemics may be as important as resolving the immediate


Acharya, V, T Johnson, S Sundaresan and S Zheng (2020), ‘DP15558 The Value of a Cure: An Asset Pricing Perspective‘, CEPR Discussion Paper No. 15558. CEPR Press, Paris & London. https://cepr.org/publications/dp15558