The Effects of the COVID-19 Crisis on Risk Factors and Option-Implied Expected Market Risk Premia: An International Perspective

Belén Nieto and Gonzalo Rubio
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Belén Nieto: Department of Financial Economics and Accounting, University of Alicante, San Vicente del Raspeig, 03690 Alicante, Spain
Gonzalo Rubio: Department of Economics and Business, CEU Cardenal Herrera University, Reyes Católicos 19, 03204 Elche, Spain

JRFM, 2022, vol. 15, issue 1, 1-29

Abstract: Institutional investors often have to decide which strategy to use across international business cycles. This is especially important during economic and financial crises. The exogenous nature of the outbreak of the dramatic COVID-19 crisis represents a unique opportunity to understand the performance of risk factors during severe economic times across international stock markets. Even more important is to analyze how these factors behave across very different economic crises, such as the COVID-19 pandemic and the Great Recession. Although, the overall results show that the momentum and quality factors are the winners, with the value factor as the loser, this research also reports different responses of factors across crises and countries. The size, value, and defensive factors tend to perform worse during the health crisis relative to the Great Recession, while the momentum factor shows a poor performance during the financial crisis, but a positive one during the outbreak of COVID-19. The quality factor is an extraordinary defensive factor in both crises. Similarly, this paper reports heterogeneous responses of option-implied expected market risk premia across alternative stock market indices, and between the Great Recession and the COVID-19 crisis.

Keywords: COVID-19; risk factors; Great Recession; expected market risk premia (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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