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Pandemic options

Author

Listed:
  • Juan Peng
  • Jinhong Wang
  • Jinqiang Yang

Abstract

We develop a pricing model for pandemic European call and put options, in which the underlying variable is the infected population. Interestingly, the economic predictions of the pandemic options are essentially different from the common stock option. For example, the value of pandemic call option is concave in the underlying variable and decreasing in the volatility. In addition, the maturity has ambiguous impact on the valuation of pandemic call option. We show that the basic reproduction number, the unique characteristics of pandemic, has a significant effect on the valuation of each options.

Suggested Citation

  • Juan Peng & Jinhong Wang & Jinqiang Yang, 2022. "Pandemic options," Applied Economics, Taylor & Francis Journals, vol. 54(55), pages 6437-6444, November.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:55:p:6437-6444
    DOI: 10.1080/00036846.2022.2066061
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