Journal Pre-proof

COVID-19 and finance: Agendas for future research

John W. Goodell

PII: S1544-6123(20)30397-4
DOI: https://doi.org/10.1016/j.frl.2020.101512
Reference: FRL 101512

To appear in: Finance Research Letters

Received date: 27 March 2020

Accepted date: 29 March 2020

Please cite this article as: John W. Goodell , COVID-19 and finance: Agendas for future research,
Finance Research Letters (2020), doi: https://doi.org/10.1016/j.frl.2020.101512

This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition
of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of
record. This version will undergo additional copyediting, typesetting and review before it is published
in its final form, but we are providing this version to give early visibility of the article. Please note that,
during the production process, errors may be discovered which could affect the content, and all legal
disclaimers that apply to the journal pertain.

© 2020 Published by Elsevier Inc.

 COVID-19 and finance: Agendas for future research

by

blinded

JEL Classifications: H12; H41; H51; Q54

Keywords: COVID-19 and finance; Pandemics; Financial market risk; Bank risk; Catastrophe insurance
*Corresponding author
March 2020

The author is grateful to the Editor; and other colleagues for useful comments. But author remains solely
responsible for the contents.
 COVID-19 and finance: Agendas for future research
Abstract
This paper highlights the enormous economic and social impact of COVID-19 with respect to articles that
have either prognosticated such a large-scale event, and its economic consequences, or have assessed the
impacts of other epidemics and pandemics. A consideration of possible impacts of COVID-19 on financial
markets and institutions, either directly or indirectly, is briefly outlined by drawing on a variety of
literatures. A consideration of the characteristics of COVID-19, along with what research suggests have
been the impacts of other past events that in some ways roughly parallel COVID-19, points toward avenues
of future investigation.

1. Introduction
We are all now tragically familiar with the ongoing enormous costs in lives of the COVID-19

pandemic. We are all additionally fearful of the eventual economic impact of the crisis, including the impact

on financial markets. At the time of writing this article this pandemic is ongoing, with the eventual scale of

the disaster still unknown. However, it is reasonable to expect a great deal of interest in the very near future

on the role of pandemics in finance.

This brief article is anticipatory, sketching the scant research, yet, on pandemics and finance, as

well as suggesting partial parallels with other more-explored areas of financial economics research. Recent

academic articles, along with assessing the impacts of past epidemics and pandemics, also eerily

prognosticate large-scale events such as COVID-19, and its economic consequences. A consideration of

possible impacts of COVID-19 on financial markets and institutions, either directly or indirectly, is briefly

outlined by drawing on a variety of literatures. Examining what research suggests have been the impacts of

past events that in some ways roughly parallel COVID-19, alongside a consideration of how COVID-19

may be different, suggests avenues of future investigation

2. Economic impact of pandemics

An obvious way that pandemics can impact financial systems is through their enormous economic

costs. There have been a number of articles that address the costs of pandemics, both in terms of the costs

of past pandemics such as the HIV/AIDS crisis or estimates of the cost of future pandemics. Articles on

these costs often regard ex post the costs of pandemics and epidemics. For instance, Haacker (2004)

-1-
discusses the economic costs of the HIV/AIDS pandemic, while Santaeulalia-Llopis (2008) focuses on the

impact of the HIV/AIDS pandemic on development. Yach, Stuckler, and Brownell (2006) discusses the

costs of global growth of obesity and diabetes.

Other papers, many much more closely related to the COVID-19 crisis, have warned us to anticipate

the economic costs of possible future pandemics and epidemics. Particularly prescient is Bloom, Cadarette,

and Sevilla (2018). They closely delineate the economic concerns that are now in the forefront with

COVID-19: costs to the health system, both public and private, of medical treatment of the infected and of

outbreak control; the strain to health systems of being unable to concomitantly deal with more routine health

issues during outbreaks; loss to employment productivity; social distancing disrupting economic activity;

impact of tourism; impact on foreign direct investment.

This concern is echoed by Fan, Jamison, and Summers (2018). They note very recently “an unmet

need for greater investment in preparedness against major epidemics and pandemics.” They estimate the

expected annual losses from pandemic risk to be annually approximately 500 billion US dollars, or 0.6%

of global income. In light of the costs of COVID-19, this seemingly large sum now seems greatly

underestimated.1 Other works that highlight the need for economic risk management vis-à-vis the potential

likelihood of future pandemics include Bloom and Canning (2004); Lewis (2001); Madhav et al. (2017);

Tam, Khan, and Legido-Quigley (2016); Yach, Stuckler, and Brownell (2006) and many others.

We should also note articles that observe the number of “close calls,” in which contagious disease

outbreaks have occurred that were contained to a level far less than their potentiality. Particularly interesting

is Thomas (2018), who describes the recent lethal outbreak of the highly contagious respiratory disease

Nipah in the Kerala area of India. In this case, a larger global health issue was averted by a remarkably fast

response from public health workers.2 Particularly striking is a report from Global Preparedness Monitoring

1
They also point out that this estimate falls within the Intergovernmental Panel on Climate Change’s estimates of the range of
losses from global warming (0.2–2% of global income).
2
This was not the only outbreak of Nipah. See Bloom, Cadarette, and Sevilla (2018) for a listing of other recent contagious
disease outbreaks, including Middle East Respiratory Syndrome corona virus (MERS), Zika, Severe Acute Respiratory
Syndrome (SARS), Rift Valley fever, and others.

-2-
Board of the World Health Organization (Global-Preparedness-Monitoring-Board (2019)) as recent as

September 2019, that asserts directly that the world is imminent danger of a global pandemic and yet little

or no preparation is being undertaken. According to Global-Preparedness-Monitoring-Board (2019), during

2011–2018, the World Health Organization tracked 1,483 epidemic events in 172 countries.

3. Impact of COVID-19 on banking and insurance

Banks of course by their nature are vulnerable in times of economic downturns, because of the

likelihood of nonperforming loans and the possibility in extreme cases of bank runs. To this point, Leoni

(2013) find the spread of HIV in developing countries is associated with large increases in deposit turnover.

They attribute this to the need to pay for individual treatments forcing large‐scale withdrawals of deposits.

Lagoarde-Segot and Leoni (2013) develop a theoretical model that shows that the likelihood of a

collapse of the banking industry of a developing country increases, as the joint prevalence of large

pandemics increases. Much of the group lending of microfinance institutions and banks’ lending to the poor

will be pressured during epidemics because all members of the group will be pressured by the aggregate

shock (Skoufias, 2003). Rural financial institutions will be subject to bank runs during floods or crop

failures (Binswanger and Rosenzweig, 1986). It remains to be seen how COVID-19 will change the

practices of financial institutions.

More generally, how long will banks, all around the world, maintain a more conservative lending

policy post COVID-19? Have there been studies on bank reactions to macroeconomic shocks (Bongini et

al., 2019) that are of the magnitude of COVID-19?

Literature has considered whether “black swans” have a global impact (Wang et al., 2019). But

COVID-19 is a globally impacting phenomenon. There is also the question of whether events of the

magnitude of COVID-19 are insurable. Another question is whether COVID-19 should be regarded as a

black swan, or an unforeseeable event with extreme consequences. The answer seems to be “no.” When

you have a host of academic articles, discussed above, suggesting the possibility of pandemics and

predicting enormous economic losses as a result of pandemics; as well as numerous real-world epidemics

-3-
and health crises that could have become global pandemics, it should be regarded as something other than

totally unexpected.

Clearly pandemics such as COVID-19 are foreseeable and so it is highly beneficial such events are

insurable. Tamura and Sawada (2009) discuss the possibility of such insurance in the context of avian flu

epidemics in Vietnam. Of course, such insurance, at least at the private level, is generally only available to

those that are financially included. The bottom of the pyramid will be likely left out. Sawada and

Shimizutani (2008) note that in the aftermath of severe crises, those with personal collateral readily recover

financially, while those without means of collateral do not.

4. Impact of COVID-19 on governments and publics

Will COVID-19 lead to a long-term change in spending behaviors around the world? Haacker

(2004), for instance, notes a permanent change in consumer behavior stemming from the HIV/AIDs

epidemic. Obviously, a world-wide downturn in spending and domestic demands will present an enormous

challenge for the global economy.

Is there then a role for governments to insure against the financial impacts of pandemics? A strong

role for the public sector is indicated in cases where the private sector is unwilling to insure (see how many

pandemic exclusion clauses are in the fine print of insurance contracts), there would be less concern for the

public sector crowding out private insurance (see Cummins, 2006). But is the problem too big?3

Cavallo et al. (2013) find that only extremely large disasters have a negative effect on output in

both the short and the long runs. However, they note that their results stem from a few cases where radical

political revolutions followed the disasters. How much of COVID-19’s lasting effects on economic output

will be driven by a catalyzing of political change?

Is COVID-19 different enough from other natural disasters to be a special case? Or should we

expect as in other cases of disasters, economic output will return to normal? Certainly, there is the potential

for COVID-19 to impact the institutional nature of healthcare and public support; impact attitudes toward

3
See Michel-Kerjan (2010) for a critical analysis of the US federal flood insurance program.

-4-
governments; and impact demands for effective public action. How states can manage the potentiality of

natural disasters (Ghesquiere and Mahul, 2010)? It is likely that increasingly control and preparations for

pandemics will be seen as a public good (Kölle, 2015; Yamey, Ogbuoji, and McDade, 2018).

Another question is how will COVID-19 impact social trust? The fact that pandemics such as

COVID-19 affect differently differing portions of the economic spectrum and different ages will have

ramifications. Noy (2009) observes that developing countries suffer more from natural disasters. As noted

by Bjørnskov (2008), social fractionalization undermines social trust. Less social trust leads to additional

transaction costs throughout the financial system (Fukuyama, 1995). What will be the impacts on popular

support for social and economic globalization?

5. Impact of pandemics on financial markets

While there is limited prior literature on how epidemics, let alone pandemics, impact financial

markets, imperfect parallels can be drawn from other forms of natural disasters. Markets react to natural

disaster such as earthquakes and volcanos; as well as air disasters; and more recently acts of terrorism.

While, for instance, the COVID-19 has been devastating to airline industry around the world, with respect

to air crash disasters, Bosch, Eckard, and Singal (1998) suggest some airlines, post air crashes, will benefit

from customers shifting airlines. This is unlikely to occur with COVID-19 which is depressing air travel

globally amongst all airlines. Certainly, COVID-19 will impact some industries more than others. But

COVID-19 also will also enormously affect domestic demands generally across almost every country.

The degree of overlap of other disasters providing insight into the potential impact of COVID-19

on the financial markets has much to do with levels of spillover associated with other previous events. As

COVID-19’s impact will blanket the globe, it is useful to compare the COVID-19 situation to past events

that, although more localized, have led to spillovers that have established general impacts. Research on the

impact of terrorist events on the financial markets might provide some sort of parallel, as terrorist events,

while localized in their initial manifestation are by their nature designed to create a widespread change in

public mood.

-5-
 Karolyi (2006) discusses the “spillover effects” of terrorist attacks and whether research on this

topic suggests a broad-based or “systematic” contribution of potential terrorism to overall risk. His

conclusion is that the evidence is quite limited, but there have been few tests that have examined volatility

or beta risks with asset-pricing models. Some papers suggest that the downturn in markets with respect to

terrorist events is rather mild, with downturns only very short (Brounen and Derwall, 2010). Choudhry

(2003) investigated, post September 11, a small number of US firms in a variety of different industries to

see if this terrorist event affected a shift in market betas, with mixed findings. Hon, Strauss, and Yong

(2004) find that the September 11 terrorist attacks led to an increase in correlations amongst global markets,

with this effect varying by global region. A number of other papers present a mixed picture of how much

terrorist acts have spilled over into changes in the nature of financial markets (e.g., Chesney, Reshetar, and

Karaman, 2011; Choudhry, 2005; Corbet, Gurdgiev, and Meegan, 2018; Nikkinen and Vähämaa, 2010).4

COVID-19 is perhaps a unique outcome in terms of its global scope as a pandemic, at least since

the influenza pandemic of 1918. But, as discussed above, a disaster on the scale of COVID-19 was not an

extremely unlikely possibility. It is interesting to compare the COVID-19 outcome (thus far) to an imagined

nuclear conflict. Nuclear conflict, unless one considers dubiously a very localized impact, is not survivable

by anyone on Earth. Consequently, a threat of nuclear war, apart from signaling economically impacting

international tensions, is widely seen as having almost no impact on market prices. The reason seems to be

not because of its low probability, but because in the event of a non-survivable event other outcomes are

irrelevant.

According to Epstein (2019) (following US Social Security Administration data), the probability

of a 35 year-old man in the US dying within the next year is under 0.2%. For a 35-year-old woman, chances

are about 0.1%. These probabilities increase only very gradually with age. Even a 50-year old man runs a

mere 0.5% risk, a 50-year old woman just 0.3%. In comparison, what are the odds that there might be a

global nuclear conflagration in the next year? The answer might be that we don’t have enough data to form

4
See also cyberattacks (e.g., Caporale et al. (2020).

-6-
such an estimation. Nuclear wars, seen as probability tail events, are seen as not survivable by most people.

In other words, the answer to a question of “how will nuclear war affect my 401k?”, is that it doesn’t matter

because absent life on earth, a defined contribution plan has no utility. COVID-19 on the other hand is

creating economic destruction on an unprecedented scale (witness the $2.2 trillion bailout package in the

US versus the $750 billion package during the global financial crisis). But, unlike global nuclear conflict,

COVID-19 is survivable and the value of financial markets will remain extremely relevant. It seems very

likely that the next time there is a sudden appearance of a contagious respiratory illness, there will

concomitantly be a substantial global financial market reaction. Certainly COVID-19 will shape future

investigations of tail risk and financial markets (e.g., Kwon, 2019).

6. Impact of COVID-19 on financing and costs of capital

An issue that will likely be considered by researchers is how COVID-19 will potentially

permanently change firm financing. As discussed above, COVID-19 highlights the possibility, or indeed

the likelihood, of contagious disease events that will have tremendous negative impacts on global domestic

demand. This is a game changer from financial markets neglecting to price the potentiality of horrific tail-

risk events that would not be survivable anyway. COVID-19 and others like it are globally damaging to the

world economy to a rarely precedented extent. But they are survivable. We should expect now that there

will be a long-term impact on firm financing and firm costs of capital.

Elnahas, Kim, and Kim (2018) find that firms located in more disaster-prone areas adapt to be less

levered. Consistent with a trade-off view of capital structure (Kraus and Litzenberger, 1973), they attribute

this finding to firms being impacted in disastrous areas with respect to operating disruption, increased costs

of capital, and tightened financial flexibility. While firms are often seen as persistent in their capital

structure policy, they often respond to macroeconomic shocks (Huang, Gao, and Chen, 2018).

COVID-19 clearly suggests a previous underpricing of equity risk. Will this lead to firms adopting

less leverage? Will there be a very long-term shifting in costs of equity? Lee and McKibbin (2004) find a

200-basis point increase in the country risk premium for China and Hong Kong following SARS. While

the impact of country-risk premiums on costs of equity will vary with firm exposures to various markets,

-7-
certainly, an increase of two percent points in a country risk premium (likely much higher for COVID-19)

would lead to a significant increase in the cost of equity capital, with a concomitant underfunding of global

pensions. But the findings of increased country risk of Lee and McKibbin (2004) for China and Hong Kong

are based on China and Hong Kong being particular risk areas for SARS. With a genuine pandemic like

COVID-19 however the exposure is global rather than in select countries.

7. Conclusions

The COVID-19 crisis is informing investors, policy makers and the public at large that natural

disasters can inflict economic damage on a previously unprecedented scale. Unlike events such as global

nuclear war, which is not survivable and so of no relevant cost, or events such as climate change that are

much slower moving, or localized disasters that create spillover and market reactions, the COVID-19

pandemic is causing a direct global destructive economic impact that is present in every area of the globe.

All parties must now face what has already been obvious to many that such phenomenon are imminently

possible and indeed likely. How will this effect costs of capital; pension planning; insurance; the role of

governments protecting financial systems; social trust and concomitant transaction costs; and political

stability in societies? No doubt these questions and many others will be grappled with by financial

academics for many years to come.

-8-
References
Binswanger, Hans P, and Mark R Rosenzweig, (1986), "Behavioural and material determinants of production
relations in agriculture", Journal of Development Studies 22 (3) pp. 503-539.
Bjørnskov, Christian, (2008), "Social trust and fractionalization: A possible reinterpretation", European
Sociological Review 24 (3) pp. 271-283.
Bloom, David E, and David Canning, (2004), "Epidemics and economics: Interactions between global change and
human health ", Scripta Varia 106 pp. 304-331.
Bloom, David E. , Daniel Cadarette, and JP Sevilla, (2018), "Epidemics and economics: New and resurgent
infectious diseases can have far-reaching economic repercussions", Finance and Development 55 (2) pp.
46-49.
Board, Global Preparedness Monitoring, (2019), "A World At Risk" (Global Board Preparedness Monitoring of
the World Health Organization, Washington)
Bongini, Paola, Doriana Cucinelli, Maria Luisa Di Battista, and Laura Nieri, (2019), "Profitability shocks and
recovery in time of crisis evidence from European banks", Finance Research Letters 30 pp. 233-239.
Bosch, Jean-Claude, E Woodrow Eckard, and Vijay Singal, (1998), "The competitive impact of air crashes: Stock
market evidence", Journal of Law and Economics 41 (2) pp. 503-519.
Brounen, Dirk, and Jeroen Derwall, (2010), "The impact of terrorist attacks on international stock markets",
European Financial Management 16 (4) pp. 585-598.
Caporale, Guglielmo Maria, Woo-Young Kang, Fabio Spagnolo, and Nicola Spagnolo, (2020), "Non-linearities,
cyber attacks and cryptocurrencies", Finance Research Letters 32 pp. 101297.
Cavallo, Eduardo, Sebastian Galiani, Ilan Noy, and Juan Pantano, (2013), "Catastrophic natural disasters and
economic growth", Review of Economics and Statistics 95 (5) pp. 1549-1561.
Chesney, Marc, Ganna Reshetar, and Mustafa Karaman, (2011), "The impact of terrorism on financial markets:
An empirical study", Journal of Banking and Finance 35 (2) pp. 253-267.
Choudhry, Taufiq, (2005), "September 11 and time-varying beta of United States companies", Applied Financial
Economics 15 (17) pp. 1227-1242.
Corbet, Shaen, Constantin Gurdgiev, and Andrew Meegan, (2018), "Long-term stock market volatility and the
influence of terrorist attacks in Europe", Quarterly Review of Economics and Finance 68 pp. 118-131.
Cummins, J David, (2006), "Should the government provide insurance for catastrophes", Federal Reserve Bank
of St. Louis Review 88 (4) pp. 337-379.
Elnahas, Ahmed, Dongnyoung Kim, and Incheol Kim, (2018), "Natural disaster risk and corporate leverage",
Working Paper.
Epstein, David, (2019), "Nuclear risk and financial markets," Enterprlslng Investor
(httf!s://blogs.cfalnstitute.org/lnvesotr). April, CFA Institute, accessed March 26, 2020
Fan, Victoria Y., Dean T. Jamison, and Lawrence H. Summers, (2018), "Pandemic risk: how large are the expected
losses?", Bulletin of the World Health Organization 96 (2) pp. 129-134.
Fukuyama, Francis, (1995), Trust: The Social Virtues and the Creation of Prosperity (Free Press, New York).
Ghesquiere, Francis, and Olivier Mahul, (2010), "Financial protection of the state against natural disasters: A
primer", World Bank Policy Research Working Paper (5429) pp. 1-26
Global-Preparedness-Monitoring-Board, (2019), "A world at risk: annual report on global preparedness for health
emergencies. " (Global Preparedness Monitoring Board of the World Health Organization, Geneva)
Haacker, Markus, (2004), The Impact of HIV/AIDS on Government Finance and Public Services (International
Monetary Fund, Washington).

-9 -
Hon, Mark T, Jack Strauss, and Soo‐Keong Yong, (2004), "Contagion in financial markets after September 11:
myth or reality?", Journal of Financial Research 27 (1) pp. 95-114.
Huang, Zhen, Weiwei Gao, and Liying Chen, (2018), "Does the external environment matter for the persistence
of firms' debt policy?", Finance Research Letters pp. 2-9
Karolyi, George Andrew, (2006), "The consequences of terrorism for financial markets: what do we know?",
Working Paper pp.
Kölle, Felix, (2015), "Heterogeneity and cooperation: The role of capability and valuation on public goods
provision", Journal of Economic Behavior and Organization 109 pp. 120-134.
Kraus, Alan, and Robert H Litzenberger, (1973), "A state‐preference model of optimal financial leverage",
Journal of Finance 28 (4) pp. 911-922.
Kwon, Ji Ho, (2019), "Tail risk and the consumption CAPM", Finance Research Letters 30 pp. 69-75.
Lagoarde-Segot, Thomas, and Patrick L Leoni, (2013), "Pandemics of the poor and banking stability", Journal of
Banking and Finance 37 (11) pp. 4574-4583.
Lee, Jong-Wha, and Warwick J McKibbin, (2004), "Estimating the global economic costs of SARS", Learning
from SARS: preparing for the next disease outbreak: workshop summary (National Academies Press
Washington, DC).
Leoni, Patrick L, (2013), "HIV/AIDS and banking stability in developing countries", Bulletin of Economic
Research 65 (3) pp. 225-237.
Lewis, Maureen, (2001), "The Economics of Epidemics", Georgetown Journal of International Affairs 2 pp. 25.
Madhav, Nita, Ben Oppenheim, Mark Gallivan, Prime Mulembakani, Edward Rubin, and Nathan Wolfe, (2017),
"Pandemics: risks, impacts, and mitigation", in Disease Control Priorities: Improving Health and
Reducing Poverty. 3rd edition The International Bank for Reconstruction and Development/The World
Bank)
Michel-Kerjan, Erwann O, (2010), "Catastrophe economics: The national flood insurance program", Journal of
Economic Perspectives 24 (4) pp. 165-86.
Nikkinen, Jussi, and Sami Vähämaa, (2010), "Terrorism and stock market sentiment", Financial Review 45 (2)
pp. 263-275.
Noy, Ilan, (2009), "The macroeconomic consequences of disasters", Journal of Development Economics 88 (2)
pp. 221-231.
Santaeulalia-Llopis, Raul, (2008), "Aggregate effects of AIDS on development", Washington University in St.
Louis Working Paper.
Sawada, Yasuyuki, and Satoshi Shimizutani, (2008), "How do people cope with natural disasters? Evidence from
the Great Hanshin‐Awaji (Kobe) earthquake in 1995", Journal of Money, Credit and Banking 40 (2‐3)
pp. 463-488.
Tam, Clarence C, Mishal S Khan, and Helena Legido-Quigley, (2016), "Where economics and epidemics collide:
migrant workers and emerging infections", Lancet 388 (10052) pp. 1374-1376.
Tamura, Sakuya , and Yasuyuki Sawada, (2009), "Consumption Insurance against Unforeseen Epidemics: The
Case of Avian Influenza in Vietnam", RIETI Discussion Paper Series 09-E-023.
Thomas, Vinod, (2018), "Containing a deadly virus: Lessons from the Nipah outbreak in India,"
https://www.brookings.edu/blog/future-development/2018/07/23/containing-a-deadly-virus-lessons-
from-the-nipah-outbreak-in-india/, Brookings Institution, accessed July 23, 2018
Wang, Yang, Xinbang Cao, Xiuping Sui, and Wenxi Zhao, (2019), "How do black swan events go global?-
Evidence from US reserves effects on TOCOM gold futures prices", Finance Research Letters 31 pp.
225-231
Yach, Derek, David Stuckler, and Kelly D Brownell, (2006), "Epidemiologic and economic consequences of the
global epidemics of obesity and diabetes", Nature Medicine 12 (1) pp. 62-66.
- 10 -
Yamey, Gavin , Osondu Ogbuoji, and Kaci Kennedy McDade, (2018), "We need a consensus on the definition
of ‘global public goods for health," Future Development,https://www.brookings.edu/blog/future-
development/2018/11/20/we-need-a-consensus-on-the-definition-of-global-public-goods-for-health/,
Brookings Institution, accessed March 23, 2020

- 11 -