The price of COVID-19-induced uncertainty in the options market

Jianhui Li; Xinfeng Ruan; Jin E Zhang

doi:10.1016/j.econlet.2021.110265

The price of COVID-19-induced uncertainty in the options market

Econ Lett. 2022 Feb:211:110265. doi: 10.1016/j.econlet.2021.110265. Epub 2022 Jan 7.

Authors

Jianhui Li¹, Xinfeng Ruan¹, Jin E Zhang¹

Affiliation

¹ Department of Accountancy and Finance, Otago Business School, University of Otago, Dunedin 9054, New Zealand.

Abstract

This paper investigates the pricing of uncertainty associated with the COVID-19 responses for 28 countries/regions in 2020. We find that such uncertainty is priced in the equity options market. Specifically, there is a price premium for options that provide protection to hedge against price risk, variance risk, and tail risk caused by a variety of World Health Organization (WHO) announcements and the lockdown announcements from governments on COVID-19. Moreover, such options tend to be more expensive when the governments place stricter restrictions.

Keywords: COVID-19; Government response; Options market; Uncertainty.