Firm-level Risk Exposures and Stock Returns in the Wake of COVID-19

Stephen Hansen, Steven Davis and Cristhian Seminario-Amez

No 15314, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Firm-level stock returns differ enormously in reaction to COVID-19 news. We characterize these reactions using the \textit{Risk Factors} discussions in pre-pandemic 10-K filings and two text-analytic approaches: expert-curated dictionaries and supervised machine learning (ML). Bad COVID-19 news lowers returns for firms with high exposures to travel, traditional retail, aircraft production and energy supply -- directly and via downstream demand linkages -- and raises them for firms with high exposures to healthcare policy, e-commerce, web services, drug trials and materials that feed into supply chains for semiconductors, cloud computing and telecommunications. Monetary and fiscal policy responses to the pandemic strongly impact firm-level returns as well, but differently than pandemic news. Despite methodological differences, dictionary and ML approaches yield remarkably congruent return predictions. Importantly though, ML operates on a vastly larger feature space, yielding richer characterizations of risk exposures and outperforming the dictionary approach in goodness-of-fit. By integrating elements of both approaches, we uncover new risk factors and sharpen our explanations for firm-level returns. To illustrate the broader utility of our methods, we also apply them to explain firm-level returns in reaction to the March 2020 Super Tuesday election results.

Date: 2020-09
New Economics Papers: this item is included in nep-big, nep-cmp, nep-hea and nep-rmg
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Related works:
Working Paper: Firm-Level Risk Exposures and Stock Returns in the Wake of COVID-19 (2020)
Working Paper: Firm-Level Risk Exposures and Stock Returns in the Wake of Covid-19 (2020)
Working Paper: Firm-Level Risk Exposures and Stock Returns in the Wake of COVID-19 (2020)
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