The impact of COVID-19 on tail risk: Evidence from Nifty index options

We investigate the impact of COVID-19 using multiple forward-looking measures of uncertainty in Indian stock markets using liquid Nifty index options. The WHO declaration of COVID-19 as a pandemic coincides with a sharp rise in all measures of uncertainty considered, including option-implied volatility smiles, risk-neutral density, skewness, and kurtosis. We find that while subsequent government-imposed lockdowns and monetary easing induced a near-normalization of skewness and kurtosis, the volatility level remained elevated, demonstrating the importance of higher moments in capturing uncertainty during a pandemic. Structural breaks identified using the Bai-Perron methodology closely track the dates of significant announcements or interventions.