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

Doron Nisani; Mahmoud Qadan; Amit Shelef

doi:10.3390/su14148527

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

Doron Nisani, Mahmoud Qadan, Amit Shelef

School Of Business Administration

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Article number	8527
Journal	Sustainability (Switzerland)
Volume	14
Issue number	14
DOIs	https://doi.org/10.3390/su14148527
State	Published - 12 Jul 2022

Bibliographical note

Funding Information:
The authors thank the SHILUVIM Program for the COVID-19 Inter-discipline Research at the Herta and Paul Amir Faculty of Social Science in the University of Haifa for funding this research. The authors thank Ralph Sonenshine from the American University, Taufiq Choudhry from the University of Southampton, and the three anonymous reviewers for their helpful comments.

Publisher Copyright:
© 2022 by the authors.

Keywords

ambiguity measurement
COVID-19 pandemic
expected utility with uncertainty probabilities model
financial markets
Knightian uncertainty

ASJC Scopus subject areas

Computer Science (miscellaneous)
Geography, Planning and Development
Renewable Energy, Sustainability and the Environment
Building and Construction
Environmental Science (miscellaneous)
Energy Engineering and Power Technology
Hardware and Architecture
Computer Networks and Communications
Management, Monitoring, Policy and Law

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.3390/su14148527

Cite this

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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{\textquoteright} 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{\textquoteright} 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.",

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

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

UN SDGs

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