The price of COVID-19-induced uncertainty in the options market

Jianhui Li; Xinfeng Ruan; Jin E. Zhang

doi:10.1016/j.econlet.2021.110265

The price of COVID-19-induced uncertainty in the options market

Jianhui Li^*, Xinfeng Ruan, Jin E. Zhang

^*Corresponding author for this work

University of Otago

Research output: Contribution to journal › Article › peer-review

2 Citations (Scopus)

Abstract

This paper investigates the pricing of uncertainty associated with the COVID-19 responses for 28 countries/regions in 2020. We find that such uncertainty is priced in the equity options market. Specifically, there is a price premium for options that provide protection to hedge against price risk, variance risk, and tail risk caused by a variety of World Health Organization (WHO) announcements and the lockdown announcements from governments on COVID-19. Moreover, such options tend to be more expensive when the governments place stricter restrictions.

Original language	English
Article number	110265
Journal	Economics Letters
Volume	211
DOIs	https://doi.org/10.1016/j.econlet.2021.110265
Publication status	Published - Feb 2022
Externally published	Yes

Keywords

COVID-19
Government response
Options market
Uncertainty

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10.1016/j.econlet.2021.110265

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abstract = "This paper investigates the pricing of uncertainty associated with the COVID-19 responses for 28 countries/regions in 2020. We find that such uncertainty is priced in the equity options market. Specifically, there is a price premium for options that provide protection to hedge against price risk, variance risk, and tail risk caused by a variety of World Health Organization (WHO) announcements and the lockdown announcements from governments on COVID-19. Moreover, such options tend to be more expensive when the governments place stricter restrictions.",

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AB - This paper investigates the pricing of uncertainty associated with the COVID-19 responses for 28 countries/regions in 2020. We find that such uncertainty is priced in the equity options market. Specifically, there is a price premium for options that provide protection to hedge against price risk, variance risk, and tail risk caused by a variety of World Health Organization (WHO) announcements and the lockdown announcements from governments on COVID-19. Moreover, such options tend to be more expensive when the governments place stricter restrictions.

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KW - Uncertainty

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The price of COVID-19-induced uncertainty in the options market

Abstract

Keywords

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