Pandemic Tail Risk

This paper studies the measurement of forward-looking tail risk in US equity markets around the COVID-19 outbreak. We document that financial markets are informative about how pandemic risk has spread in the economy in advance of the actual outbreak. While the tail risk of the market index did not respond before the outbreak, investors recognized less pandemic-resilient economic sectors whose tail risk boomed in advance of both the market drawdown and the adaptation of social distancing provisions. This pattern is robust to alternative specifications of forward-looking tail risk, measured from either option contracts, and to various horizons.