Accepted author manuscript, 1.14 MB, PDF document
Available under license: CC BY: Creative Commons Attribution 4.0 International License
Final published version
Licence: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Is firm-level political risk priced in the equity option market?
AU - Ho, Thang
AU - Kagkadis, Anastasios
AU - Wang, George
PY - 2024/3/31
Y1 - 2024/3/31
N2 - 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.
AB - 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.
U2 - 10.1093/rapstu/raad013
DO - 10.1093/rapstu/raad013
M3 - Journal article
VL - 14
SP - 153
EP - 195
JO - Review of Asset Pricing Studies
JF - Review of Asset Pricing Studies
SN - 2045-9920
IS - 1
ER -