The BP Oil Disaster : Stock and Option Market Reactions

The BP Deepwater Horizon drilling rig exploded on April 20, 2010, leading to an unprecedented environmental and financial disaster. This paper details responses in the financial markets for BP securities, including stock, bonds, options, and credit default swaps. Following the disaster BP shares dropped more than 50 percent in value, with high volatility. BP share trading volume increased thirteen-fold, and option trading volume increased twenty-fold. The implied volatility of BP shares also jumped, ranging between two and four times its earlier levels. Interest rate spreads on BP bonds widened and the prices of credit default swaps exploded. Finally, on June 16, the company announced that cash dividends were suspended. We provide evidence from options markets that this dividend suspension was anticipated. From late June through September, there was a partial reversion to pre-explosion levels in all markets. We detail the degree of integration across markets, as wide swings in BP's outlook were simultaneously absorbed in the various markets