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What Do Index Options Teach Us About COVID-19?

Author

Listed:
  • Jens Jackwerth
  • Jeffrey Pontiff

Abstract

Risk-neutral distributions of the S&P 500 are informative about the COVID-19 pandemic beyond what one can learn from index values and the market fear gauge of the VIX alone. We learn that, on February 20, 2020, the index did not yet reflect the impending crisis. Only on March 16, 2020, was the full impact visible, with a pronounced bimodality for longer-maturity options revealing a sizeable crash scenario. The corresponding physical distribution is more symmetric and features a high-volatility crash scenario. Firms bought crash protection ahead of the index crash, whereas retail customers bought it as the index was already recovering.

Suggested Citation

  • Jens Jackwerth & Jeffrey Pontiff, 0. "What Do Index Options Teach Us About COVID-19?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(4), pages 618-634.
    • Handle: RePEc:oup:rasset:v:10:y::i:4:p:618-634.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raaa012
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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