Pandemic Tail Risk
41 Pages Posted: 3 Dec 2020 Last revised: 3 May 2021
Date Written: December 2, 2020
This paper studies the tail risk of US equity markets in advance of the COVID-19 outbreak in February 2020, providing evidence that financial markets are informative about pandemic risk well in advance of the actual outbreak. Specifically, while the tail risk of the market index did not respond before the outbreak, we document that the tail risk of less pandemic-resilient economic sectors boomed in advance. This result is robust to alternative specifications of tail risk measured from either option or credit default swap contracts. Long-horizon tail risk measures provide information about investors' perception of pandemic risk persistence and economic recovery.
Keywords: COVID-19, tail risk, economic sectors
JEL Classification: G01, G10, G12, G14
Suggested Citation: Suggested Citation