TY - JOUR
T1 - The COVID-19 risk in the cross-section of equity options
AU - Jitsawatpaiboon, Kanokrak
AU - Ruan, Xinfeng
N1 - Publisher Copyright:
© 2023 The Author(s)
PY - 2023/5
Y1 - 2023/5
N2 - 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.
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 - http://www.scopus.com/inward/record.url?scp=85150077267&partnerID=8YFLogxK
U2 - 10.1016/j.frl.2023.103684
DO - 10.1016/j.frl.2023.103684
M3 - Article
AN - SCOPUS:85150077267
SN - 1544-6123
VL - 53
JO - Finance Research Letters
JF - Finance Research Letters
M1 - 103684
ER -