The COVID-19 risk in the cross-section of equity options

Kanokrak Jitsawatpaiboon; Xinfeng Ruan

doi:10.1016/j.frl.2023.103684

The COVID-19 risk in the cross-section of equity options

Kanokrak Jitsawatpaiboon
, Xinfeng Ruan^*

^*Corresponding author for this work

University of Otago

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

Abstract

We use the implied volatility slope measures derived from US stock options to examine the impact of COVID-19 risk on the options market. The severity of COVID-19 is measured by the number of new confirmed cases. We find that equity options that are most sensitive to COVID-19 generate a more positive IV slope than less COVID-19-sensitive equity options. Moreover, this measure is more positive and significant during the lockdown period. Our findings suggest that the hedging cost of downside tail risk is more expensive during the high-uncertainty period, the time when COVID-19 is more intensive.

Original language	English
Article number	103684
Journal	Finance Research Letters
Volume	53
DOIs	https://doi.org/10.1016/j.frl.2023.103684
Publication status	Published - May 2023
Externally published	Yes

Keywords

COVID-19
Implied volatility slope
Options market
Tail risk

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10.1016/j.frl.2023.103684

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title = "The COVID-19 risk in the cross-section of equity options",

abstract = "We use the implied volatility slope measures derived from US stock options to examine the impact of COVID-19 risk on the options market. The severity of COVID-19 is measured by the number of new confirmed cases. We find that equity options that are most sensitive to COVID-19 generate a more positive IV slope than less COVID-19-sensitive equity options. Moreover, this measure is more positive and significant during the lockdown period. Our findings suggest that the hedging cost of downside tail risk is more expensive during the high-uncertainty period, the time when COVID-19 is more intensive.",

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author = "Kanokrak Jitsawatpaiboon and Xinfeng Ruan",

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year = "2023",

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AB - We use the implied volatility slope measures derived from US stock options to examine the impact of COVID-19 risk on the options market. The severity of COVID-19 is measured by the number of new confirmed cases. We find that equity options that are most sensitive to COVID-19 generate a more positive IV slope than less COVID-19-sensitive equity options. Moreover, this measure is more positive and significant during the lockdown period. Our findings suggest that the hedging cost of downside tail risk is more expensive during the high-uncertainty period, the time when COVID-19 is more intensive.

KW - COVID-19

KW - Implied volatility slope

KW - Options market

KW - Tail risk

UR - https://www.scopus.com/pages/publications/85150077267

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DO - 10.1016/j.frl.2023.103684

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SN - 1544-6123

VL - 53

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ER -

The COVID-19 risk in the cross-section of equity options

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Keywords

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