The Impact of the Coronavirus Crisis on the Market Price of Risk

38 Pages Posted: 9 Jun 2020 Last revised: 31 Mar 2021

See all articles by Manthos D. Delis

Manthos D. Delis

Audencia Business School

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping

Panayiotis Theodossiou

Ball State University

Date Written: December 18, 2020

Abstract

We study an equilibrium risk and return model to explore the effects of the coronavirus crisis and associated skewness on the market price of risk. We derive the moment and equilibrium equations, specifying skewness price of risk as an additive component of the effect of variance on mean expected return. We estimate our model using the flexible skewed generalized error distribution, for which we derive the distribution of returns and the likelihood function. Using S&P 500 Index returns from January 1980 to mid-October 2020, our results show that the coro-navirus crisis generated a deeply negative reaction in the skewness and total market price of risk, more negative even than the subprime and the October 1987 crises.

Keywords: Asset pricing, Risk and return, Skewness, Coronavirus crisis, Subprime crisis

JEL Classification: G01, G11, G12, C32, C51

Suggested Citation

Delis, Manthos D. and Savva, Christos S. and Theodossiou, Panayiotis, The Impact of the Coronavirus Crisis on the Market Price of Risk (December 18, 2020). Journal of Financial Stability, Vol. 53, 2021, Available at SSRN: https://ssrn.com/abstract=3618827 or http://dx.doi.org/10.2139/ssrn.3618827

Manthos D. Delis (Contact Author)

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping ( email )

Limassol, 3603
Cyprus
00357252349 (Phone)
00357252674 (Fax)

HOME PAGE: http://www.csavva.com

Panayiotis Theodossiou

Ball State University ( email )

2000 W. University Ave
Muncie, IN Delaware 47306
United States

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