The effects of political uncertainty on options: An empirical study of S&P 500, Euro Stoxx 50, and S&P sectors around political events

Sammanfattning: We study options spanning political events and examine whether a price premium, associated with the political uncertainty from events, exists. First, we use recent data and replicate parts of Kelly, Pastor, and Veronesi (2016) by analysing how the price risk, variance risk, and tail risk associated with political events, affect equity options on the S&P 500 and Euro Stoxx 50 indices. Our results indicate a price premium on options spanning political events, and this premium is also larger when the economic conditions are weaker. Second, we apply the analysis to S&P sectors with varying political exposure by examining if sectors that are more affected by political uncertainty, also exhibit higher implied volatility premium during political events, compared to less exposed sectors. In fact, we find a pattern supporting this, however, the empirical evidence is too weak to draw any firm conclusions. Also, we do not find any support that this implied volatility premium difference between the more and less exposed sectors, would be any larger when the economy is weaker.