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Rational repricing of risk during COVID‐19: Evidence from Indian single stock options market

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  • Sobhesh Kumar Agarwalla
  • Jayanth R. Varma
  • Vineet Virmani

Abstract

Could the COVID‐19 related market crash and subsequent rebound be explained as a rational response to evolving conditions? Our results using multiple forward‐looking measures of uncertainty implied from stock option prices suggest so. First, we find a gradual build‐up of volatility during the month preceding the spike at the start of the pandemic. Second, while tail risk declined after government interventions, the level of uncertainty remained elevated for stocks across industries. Third, the dynamics of decline in tail risk in stocks was industry‐dependent, suggesting that the market performed a fine‐grained analysis of each stock's uncertainty through the pandemic.

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  • Sobhesh Kumar Agarwalla & Jayanth R. Varma & Vineet Virmani, 2021. "Rational repricing of risk during COVID‐19: Evidence from Indian single stock options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(10), pages 1498-1519, October.
    • Handle: RePEc:wly:jfutmk:v:41:y:2021:i:10:p:1498-1519
    DOI: 10.1002/fut.22240
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    Cited by:

    1. Sudarshan Kumar & Sobhesh Kumar Agarwalla & Jayanth R. Varma & Vineet Virmani, 2023. "Harvesting the volatility smile in a large emerging market: A Dynamic Nelson–Siegel approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1615-1644, November.
    2. Sumit Saurav & Sobhesh Kumar Agarwalla & Jayanth R. Varma, 2024. "Role of derivatives market in attenuating underreaction to left‐tail risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(3), pages 484-517, March.
    3. Sumit Saurav & Sobhesh Kumar Agarwalla & Jayanth R. Varma, 2023. "Belief distortion near 52W high and low: Evidence from Indian equity options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1531-1558, November.
    4. Sobhesh Kumar Agarwalla & Sumit Saurav & Jayanth R. Varma, 2022. "Lottery and bubble stocks and the cross‐section of option‐implied tail risks," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(2), pages 231-249, February.

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