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Is Firm-Level Political Risk Priced in the Equity Option Market?

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  • Thang Ho
  • Anastasios Kagkadis
  • George Wang

Abstract

We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of high intermediary constraints, and is stronger among high-demand pressure options but weaker among politically active firms. Finally, consistent with a risk-based explanation, investors of options on politically risky firms are compensated with high returns when major unexpected political shocks happen. (JEL G13, G18)

Suggested Citation

  • Thang Ho & Anastasios Kagkadis & George Wang, 2024. "Is Firm-Level Political Risk Priced in the Equity Option Market?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(1), pages 153-195.
    • Handle: RePEc:oup:rasset:v:14:y:2024:i:1:p:153-195.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raad013
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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