N°23-95: Volatility during the COVID-19 Pandemic

We examine the impact of COVID-19 on market volatility in an equilibrium framework. The model combines beliefs-dependent preferences for economic dynamics and a stochastic SEIRD model with unpredictable birth/vaccine events and mitigating policies for disease propagation. The estimated model explains the realized trajectories of the S&P 500 volatility and number of new cases, identifies the source and composition of the volatility spike, while providing a good match for 25 unconditional moments of economic series. Beliefs-dependence is critical for this comprehensive explanation of short- and long-run properties. A model comparison study is performed. Mitigation policies are examined.