Pandemic Tail Risk

This paper shows that tail risk in US equity markets increased in advance of the COVID-19 outbreak in February 2020. While tail risk of the market index did not move much before the outbreak, we document that tail risk of less pandemic-resilient economic sectors boomed in advance. This result is robust to alternative specifications of tail risk, measured from either option or credit default swap contracts. Long-horizon tail risk measures provide information about investors' perception of pandemic risk persistence and economic recovery.