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Is firm-level political risk priced in the equity option market?

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>31/03/2024
<mark>Journal</mark>Review of Asset Pricing Studies
Issue number1
Number of pages43
Pages (from-to)153-195
Publication StatusPublished
Early online date27/10/23
<mark>Original language</mark>English


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.