Is Firm-Level Political Risk Priced in the Equity Option Market?

Ho, T, Kagkadis, A ORCID: 0000-0002-3840-5981 and Wang, G (2024) Is Firm-Level Political Risk Priced in the Equity Option Market? Review of Asset Pricing Studies, 14 (1). pp. 153-195. ISSN 2045-9920, 2045-9939

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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 are compensated with high returns when major unexpected political shocks happen. (JEL G13, G18)

Item Type:	Article
Uncontrolled Keywords:	38 Economics, 3502 Banking, Finance and Investment, 3801 Applied Economics, 35 Commerce, Management, Tourism and Services
Divisions:	Faculty of Humanities & Social Sciences Faculty of Humanities & Social Sciences > School of Management
Depositing User:	Symplectic Admin
Date Deposited:	31 Mar 2025 08:28
Last Modified:	28 Feb 2026 01:19
DOI:	10.1093/rapstu/raad013
Open Access URL:	https://academic.oup.com/raps/article/14/1/153/733...
Related Websites:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3191090
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