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Volatility Markets Underreacted to the Early Stages of the COVID-19 Pandemic

Author

Listed:
  • Ing-Haw Cheng
  • Jeffrey Pontiff

Abstract

VIX futures prices rose slowly in late February and early March 2020 as the COVID-19 pandemic took hold. Futures price premiums, defined as futures prices minus real-time statistical forecasts of future VIX values, turned sharply negative and remained negative until mid-April. Trading strategies based on estimated premiums profited from the subsequent increase in market volatility and equity market crash. The underreaction of futures prices to growing pandemic risks poses a puzzle for standard asset pricing models.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Ing-Haw Cheng & Jeffrey Pontiff, 0. "Volatility Markets Underreacted to the Early Stages of the COVID-19 Pandemic," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(4), pages 635-668.
    • Handle: RePEc:oup:rasset:v:10:y::i:4:p:635-668.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raaa010
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G40 - Financial Economics - - Behavioral Finance - - - General

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