Pandemic Tail Risk

This paper studies the measurement of forward-looking tail risk in US equity markets around the COVID-19 outbreak. We document that financial markets are informative about how pandemic risk has spread in the economy in advance of the actual outbreak. While the tail risk of the market index did not respond before the outbreak, investors identified less pandemic-resilient economic sectors whose tail risk boomed in advance of both the market drawdown and the implementation of social distancing provisions. This pattern is consistent across different methodologies for measuring forward-looking tail risk, using option contracts, and across various horizons.

Keywords: COVID-19, tail risk, economic sectors, resilience, tail risk, economic sectors, G10, G12, G14, event study

JEL Classification: G01, G10, G12, G14

Suggested Citation: Suggested Citation

Breugem, Matthijs and Corvino, Raffaele and Marfè, Roberto and Schönleber, Lorenzo, Pandemic Tail Risk (December 2, 2020). Journal of Banking & Finance, volume 167, 2024[10.1016/j.jbankfin.2024.107257], Available at SSRN: https://ssrn.com/abstract=3741292 or http://dx.doi.org/10.1016/j.jbankfin.2024.107257