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Is firm-level political risk priced in the equity option market?
Ho, Thang Kagkadis, A. Wang, G.
Ho, Thang
Kagkadis, A.
Wang, G.
Publication Date
2024-03
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© The Author 2023. Published by Oxford University Press on behalf of The Society for Financial Studies.
This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial
License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and
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11/11/2022
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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 get compensated with high returns when major unexpected political shocks take place.
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Citation
Ho T, Kagkadis A and Wang G (2024) Is firm-level political risk priced in the equity option market? The Review of Asset Pricing Studies. 14(1): 153-195.
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