Pandemic Tail Risk

Abstract

This paper studies the tail risk of US equity markets around the COVID-19 outbreak in February 2020. 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 recognized less pandemic-resilient economic sectors whose tail risk boomed in advance. This pattern is robust to alternative specifications of tail risk, measured from either option or credit default swap contracts, and to various horizons.

Keywords: COVID-19, tail risk, economic sectors, resilience

JEL Classification: G01, G10, G12, G14