COVID-19 Uncertainty and the Cross-Sectional Stock Returns of Airlines

Abstract

This study examines the relationship between COVID-19 uncertainty and stock returns across US airlines. Using the pandemic uncertainty index (PUI) developed by Ahir et al. (2022), we estimate a pandemic beta by augmenting the capital asset pricing model with the PUI as an additional factor. We find that the pandemic beta varies across airlines, which indicates the risk premiums of airline stocks associate with the level of pandemic uncertainty. Also, pandemic uncertainty amplifies the market risk of airline stocks. These results are relevant for asset managers whose portfolio allocation focuses on the airline industry. Further, we find that larger airlines with higher incomes and cash balances are less sensitive to the COVID-19 pandemic. These results highlight an important managerial implication for risk management, namely, that airlines with lower financial risks (i.e., a larger financial buffer) are more resilient to the COVID-19 pandemic.

Citation

Ho, C.-Y., Liu, X. and McCarthy, P.S. (2024), "COVID-19 Uncertainty and the Cross-Sectional Stock Returns of Airlines", McCarthy, P.S. (Ed.) Airlines and the COVID-19 Pandemic (Advances in Airline Economics, Vol. 11), Emerald Publishing Limited, Leeds, pp. 71-90. https://doi.org/10.1108/S2212-160920240000011004