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

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  • Li, Jianhui
  • Ruan, Xinfeng
  • Zhang, Jin E.

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.

Suggested Citation

  • Li, Jianhui & Ruan, Xinfeng & Zhang, Jin E., 2022. "The price of COVID-19-induced uncertainty in the options market," Economics Letters, Elsevier, vol. 211(C).
    • Handle: RePEc:eee:ecolet:v:211:y:2022:i:c:s0165176521004912
    DOI: 10.1016/j.econlet.2021.110265
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    Cited by:

    1. Jitsawatpaiboon, Kanokrak & Ruan, Xinfeng, 2023. "The COVID-19 risk in the cross-section of equity options," Finance Research Letters, Elsevier, vol. 53(C).

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    More about this item

    Keywords

    Uncertainty; Options market; COVID-19; Government response;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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