The Review of Asset Pricing Studies Vol. 14 No. 1 2024
Is Firm-Level Political Risk Priced in the Equity Option Market?
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 are compensated with high returns when major unexpected political shocks happen.
- DOI
- 10.1093/rapstu/raad013
- Volume
- 14
- Issue
- 1
- Pages
- 153-195
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex