Constructing a Positive Shock: Growth Through the Lens of Option Pricing

July 28, 2023

Preview Citation

Format: Chicago

Mehmet Cangul. Constructing a Positive Shock: Growth Through the Lens of Option Pricing, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Low-income economies face negative shocks whose frequency and disproportionate impact overcome growth trajectories, producing a negative drift. COVID-19 was the latest such episode. To escape this negative drift, and build a durable recovery, there is a need for a counter-balancing force: to construct a positive shock. Growth is realized through decisions that fall under two categories, routine and non-linear. While routine decisions modify existing economic behavior along the same path, non-linear decisions describe riskier options that involve transformation. Option pricing theory can be useful to describe the latter, and construct the positive shock required to escape the negative drift.

Subject: Asset prices, COVID-19, Health, National accounts, Prices, Return on investment

Keywords: Asset prices, COVID-19, Escape speed, Growth model, Option pricing growth model, Option pricing theory, Positive shock, Return on investment, Riskier option, Routine decision

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/152
Stock No:

WPIEA2023152
ISBN:

9798400246340
ISSN:

1018-5941

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