DP16112 Lockdowns as options
|Author(s):||Sweder van Wijnbergen|
|Publication Date:||November 2021|
|Keyword(s):||Irreversibility, lockdowns, Pandemic Dynamics, real options, Stochastic Vaccination arrival Information|
|JEL(s):||G12, G13, G18|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16112|
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.