The impact of COVID-19 on tail risk: Evidence from Nifty index options

Sobhesh Kumar Agarwalla, Jayanth Varma and Vineet Virmani

Economics Letters, 2021, vol. 204, issue C

Abstract: We investigate the impact of COVID-19 using multiple forward-looking measures of uncertainty in Indian stock markets using liquid Nifty index options. The WHO declaration of COVID-19 as a pandemic coincides with a sharp rise in all measures of uncertainty considered, including option-implied volatility smiles, risk-neutral density, skewness, and kurtosis. We find that while subsequent government-imposed lockdowns and monetary easing induced a near-normalization of skewness and kurtosis, the volatility level remained elevated, demonstrating the importance of higher moments in capturing uncertainty during a pandemic. Structural breaks identified using the Bai–Perron methodology closely track the dates of significant announcements or interventions.

Keywords: COVID-19; Option pricing; Risk-neutral density; Tail risk; Volatility smile; Emerging markets (search for similar items in EconPapers)
JEL-codes: G01 G13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:204:y:2021:i:c:s0165176521001555

DOI: 10.1016/j.econlet.2021.109878

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