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Coronavirus (COVID-19): market fear as implied by options prices

Author

Listed:
  • Ampudia, Miguel
  • Baumann, Ursel
  • Fornari, Fabio

Abstract

The spread of the coronavirus (COVID-19) pandemic across the globe has led to significant declines in major equity indices and a spike in volatility to values above those recorded in the aftermath of the default of Lehman Brothers in September 2008. In line with the sharp rise in current risks, investors also raised their expectations of future risks, as shown by a widening of the risk-neutral density of future euro area equity returns. The increase in perceived risks accompanied a noticeable rise in investors’ risk aversion to negative tail events. More recently, and following the announcement of significant monetary and fiscal policy stimulus, the estimated tail risk aversion has been declining, while expected risks remain elevated. JEL Classification: G10, G12, G13

Suggested Citation

  • Ampudia, Miguel & Baumann, Ursel & Fornari, Fabio, 2020. "Coronavirus (COVID-19): market fear as implied by options prices," Economic Bulletin Boxes, European Central Bank, vol. 4.
    • Handle: RePEc:ecb:ecbbox:2020:0004:2
    Note: 2445760
    as

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    File URL: https://www.ecb.europa.eu//pub/economic-bulletin/focus/2020/html/ecb.ebbox202004_02~26672a3808.en.html
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    Citations

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    Cited by:

    1. Matthijs Breugem & Raffaele Corvino & Roberto Marfè & Lorenzo Schönleber, 2020. "Pandemic Tail Risk," Carlo Alberto Notebooks 623, Collegio Carlo Alberto.
    2. John, Kose & Li, Jingrui, 2021. "COVID-19, volatility dynamics, and sentiment trading," Journal of Banking & Finance, Elsevier, vol. 133(C).
    3. Maela Giofré, 2022. "Foreign Investment, COVID-19 Stringency Measures and Risk of Openness," International Business Research, Canadian Center of Science and Education, vol. 15(4), pages 1-74, April.

    More about this item

    Keywords

    (Tail) risk aversion; coronavirus; COVID-19; equity returns; options prices;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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