Opioid Crisis: Evidence from the Option Market

Prof. Jie (Jay) CAO
Professor of Finance, The Hong Kong Polytechnic University

Date: 23 April 2024 (Tuesday)
Time: 2:30 pm to 4:00 pm
Venue: E22-G008
Host: Prof. Jing XIE, Associate Professor in Finance

This paper explores how the opioid crisis risk affects firm downside tail risk, which is priced in the option market. Using a large sample of U.S. public firms from 1999 to 2020, we find that firms located in regions with higher opioid crisis risk face higher costs of option protection against downside tail risk. To establish causality, we utilize the staggered implementation of state-level Prescription Drug Monitoring Programs (PDMPs) as exogenous shocks to reduce opioid crisis risk. We find that the cost of option protection against downside tail risk decreases following the implementation of PDMPs. Furthermore, we find that the cost of option protection against downside tail risk increases for firms with higher labor intensity, lower labor supply, lower workplace safety, a higher proportion of male employees, higher product market competition, and higher investor attention.


Prof. CAO is currently a full professor of finance at the School of Accounting and Finance, Hong Kong Polytechnic University (PolyU). He also serves as an Advisory Council member for Monetary Research at Hong Kong Institute for Monetary and Financial Research (HKIMR), an Academic and Accreditation Advisory Committee member for The Securities and Futures Commission (SFC) of Hong Kong, a member of the Board of Directors for Chicago Quantitative Alliance Asia (CQAsia), and an associate editor of Financial Management. His research interests center on empirical asset pricing, derivatives, and sustainable finance. His papers are published or forthcoming in top finance and management journals such as Journal of Financial Economics, Review of Financial Studies, Journal of Financial and Quantitative Analysis, and Management Science . He is the Principal Investigator of several Hong Kong competitive RGC grants and many other research grants from both academic and industry sponsors such as The Canadian Derivatives Institute (CDI) and Geneva Institute for Wealth Management. He has received various research awards such as AAM–CAMRI Prize in Asset Management by Asia Asset Management and NUS, the ETF Research Academy Award by the Paris–Dauphine House of Finance and Lyxor Asset Management, Chicago Quantitative Alliance (CQA) Academic Competition Award, and the best paper awards at several academic conferences such as the 28th Australian Finance & Banking Conference, 2020 FMA Consortium on Asset Management, 2020 Northern Finance Association Annual Conference, etc.

 All are welcome!