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Pandemic tail risk

Author

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  • Breugem, Matthijs
  • Corvino, Raffaele
  • Marfè, Roberto
  • Schönleber, Lorenzo

Abstract

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.

Suggested Citation

  • Breugem, Matthijs & Corvino, Raffaele & Marfè, Roberto & Schönleber, Lorenzo, 2024. "Pandemic tail risk," Journal of Banking & Finance, Elsevier, vol. 167(C).
    • Handle: RePEc:eee:jbfina:v:167:y:2024:i:c:s0378426624001717
    DOI: 10.1016/j.jbankfin.2024.107257
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    More about this item

    Keywords

    COVID-19; Tail risk; Economic sectors; Resilience; Event study;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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