Is Firm-Level Political Risk Priced in the Equity Option Market?

Thang Ho, Anastasios Kagkadis and George Wang

The Review of Asset Pricing Studies, 2024, vol. 14, issue 1, 153-195

Abstract: We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of high intermediary constraints, and is stronger among high-demand pressure options but weaker among politically active firms. Finally, consistent with a risk-based explanation, investors of options on politically risky firms are compensated with high returns when major unexpected political shocks happen. (JEL G13, G18)

Date: 2024
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