Risk and Uncertainty at the Outbreak of the COVID-19 Pandemic

Abstract

The classic paradigm in finance maintains that asset returns are paid as a compensation for bearing risk. This study extends the literature and explores whether asset prices are also affected by uncertainty. This research invokes the Expected Utility with Uncertainty Probabilities Model and utilizes the natural experiment conditions of the COVID-19 pandemic outbreak, in order to determine whether investors’ behavior during the sharp economic decline was driven by risk, or uncertainty. We limit this research only to the outbreak of the pandemic, since the recovery of the markets suggests investors have adjusted to the unexpected nature of the crisis. Using high-frequency data of the S&P 500 Index, we estimate the investors’ risk and ambiguity aversions, finding that in the pre-pandemic period investors exhibited risk aversion as well as an ambiguity-seeking attitude, while during the pandemic they demonstrated risk- and ambiguity-neutral behavior. The implications of these findings could suggest that in regular times, the financial markets are operated by risk-averse investors with decreasing risk-averse behavior.

On the General Deviation Measure and the Gini coefficient

“…Further research should consider applying the Gini coefficient not only in complete information conditions, but rather as an element of spread in the ambiguity measure (Izhakian, 2017(Izhakian, , 2020Nisani et al, 2022) for incomplete information as well.…”

Changes in Share Prices of Macrosector Companies on the Warsaw Stock Exchange as a Reaction to the COVID-19 Pandemic

“…According to Nisani et al [79], the outbreak of the COVID-19 pandemic highlighted the fragile stability of the financial markets during unexpected events (as for other uncertainty events: the September 11 attacks-2001, the global financial crisis-2008).…”

Putting the Aumann–Serrano Riskiness Index to work

“…The Stochastic Dominance Rules have an equivalent set of alternative conditions that are based on the general definition of the Lorenz Curve (Lorenz, 1905;Gastwirth, 1971; Aumann-Serrano Riskiness Index Shorrocks, 1983;Nisani, 2019a). Joining these alternative conditions and the Schechtman, Shelef, Yitzhaki and Zitikis test for examining the relation between curves (Schechtman et al, 2008), it was possible to show that index portfolios might be considered as just another asset to the investors (Nisani and Shelef, 2021) or to show the investors' behavior under severe risk and uncertainty conditions (Nisani et al, 2022). The general risk attitude describes an economic agent's attitude under risk conditions.…”