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Lockdowns as options

Author

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  • van Wijnbergen, Sweder

Abstract

The irreversibility of dying coupled with gradual information acquisition over time on the likely arrival and eventual effectiveness of vaccines confers a real option value to lockdown strategies that delay the incidence of a pandemic. We show the analogy to binary options and provide a pricing formula quantifying the option value embedded in a stochastic vaccine arrival process. The case for lockdown strategies becomes stronger the more likely vaccine discovery is, and the less uncertainty exists about its effectiveness.

Suggested Citation

  • van Wijnbergen, Sweder, 2021. "Lockdowns as options," CEPR Discussion Papers 16112, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16112
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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