Volatility During the COVID-19 Pandemic.

This article develops and estimates an equilibrium asset pricing model, called BDRA-SSL (Beliefs-Dependent Risk Aversion combined with a Susceptible-Exposed-Infectious-Recovered-Deceased (SEIRD) epidemiological model and Shelter-In-Place (SIP) and LIFT policy responses), to analyze the impact of COVID-19 on U.S. market volatility and economic dynamics. The model integrates pandemic uncertainty, government mitigation policies, and behavioral responses, explaining the sharp spike and subsequent patterns in S&P 500 volatility and new COVID-19 cases during early 2020, while matching 25 unconditional moments of long-run economic data. Empirical results show that unemployment-related informational effects primarily drive the volatility spike, and that BDRA-SSL outperforms alternative models—including those with constant relative risk aversion or simpler epidemic dynamics—in both in-sample fit and out-of-sample volatility and case forecasts. Counterfactual policy analyses reveal tradeoffs between reducing COVID-19 cases and increasing market volatility, highlighting the complex economic consequences of mitigation measures such as shelter-in-place duration and compliance rates.