Discussion Paper Details

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Title: Lockdowns as options

Author(s): Sweder van Wijnbergen

Publication Date: November 2021

Keyword(s): Irreversibility, lockdowns, Pandemic Dynamics, real options and Stochastic Vaccination arrival Information

Programme Area(s): Financial Economics

Abstract: The irreversibility of dying coupled with gradual information acquisition over time on the likely arrival and eventual effectiveness of vaccines confers a real option value to lockdown strategies that delay the incidence of a pandemic. We show the analogy to binary options and provide a pricing formula quantifying the option value embedded in a stochastic vaccine arrival process. The case for lockdown strategies becomes stronger the more likely vaccine discovery is, and the less uncertainty exists about its effectiveness.

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Bibliographic Reference

van Wijnbergen, S. 2021. 'Lockdowns as options'. London, Centre for Economic Policy Research.