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.