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Risk and Uncertainty at the Outbreak of the COVID-19 Pandemic

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  • Doron Nisani

    (School of Business Administration, University of Haifa, Haifa 3498838, Israel)

  • Mahmoud Qadan

    (School of Business Administration, University of Haifa, Haifa 3498838, Israel)

  • Amit Shelef

    (Department of Industrial Management, Sapir Academic College, Mobile Post Hof Ashkelon, Sderot 7915600, Israel)

Abstract

The classic paradigm in finance maintains that asset returns are paid as a compensation for bearing risk. This study extends the literature and explores whether asset prices are also affected by uncertainty. This research invokes the Expected Utility with Uncertainty Probabilities Model and utilizes the natural experiment conditions of the COVID-19 pandemic outbreak, in order to determine whether investors’ behavior during the sharp economic decline was driven by risk, or uncertainty. We limit this research only to the outbreak of the pandemic, since the recovery of the markets suggests investors have adjusted to the unexpected nature of the crisis. Using high-frequency data of the S&P 500 Index, we estimate the investors’ risk and ambiguity aversions, finding that in the pre-pandemic period investors exhibited risk aversion as well as an ambiguity-seeking attitude, while during the pandemic they demonstrated risk- and ambiguity-neutral behavior. The implications of these findings could suggest that in regular times, the financial markets are operated by risk-averse investors with decreasing risk-averse behavior.

Suggested Citation

  • Doron Nisani & Mahmoud Qadan & Amit Shelef, 2022. "Risk and Uncertainty at the Outbreak of the COVID-19 Pandemic," Sustainability, MDPI, vol. 14(14), pages 1-12, July.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:14:p:8527-:d:860888
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    Cited by:

    1. Jamil, Abd Rahim Md. & Law, Siong Hook & Mohamad Khair-Afham, M.S. & Trinugroho, Irwan, 2023. "Financial inclusion and economic uncertainty in developing countries: The role of digitalisation," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 786-806.
    2. Lorenzo Esposito & Letizia Malara, 2023. "Cognitive biases and historical turns. An empirical assessment of the intersections between minds and events in the investors’ decisions," DISCE - Quaderni del Dipartimento di Politica Economica dipe0029, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    3. Doron Nisani, 2023. "On the General Deviation Measure and the Gini coefficient," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 599-610, September.

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