NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

U.S. Stock Market Crash Risk, 1926-2006

David S. Bates

NBER Working Paper No. 14913
Issued in April 2009
NBER Program(s):   AP

This paper applies the Bates (RFS, 2006) methodology to the problem of estimating and filtering time- changed Lévy processes, using daily data on U.S. stock market excess returns over 1926-2006. In contrast to density-based filtration approaches, the methodology recursively updates the associated conditional characteristic functions of the latent variables. The paper examines how well time-changed Lévy specifications capture stochastic volatility, the "leverage" effect, and the substantial outliers occasionally observed in stock market returns. The paper also finds that the autocorrelation of stock market excess returns varies substantially over time, necessitating an additional latent variable when analyzing historical data on stock market returns. The paper explores option pricing implications, and compares the results with observed prices of options on S&P 500 futures.

download in pdf format
   (1624 K)

email paper

This paper is available as PDF (1624 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14913

Users who downloaded this paper also downloaded these:
Barro and Ursua w14760 Stock-Market Crashes and Depressions
McGrattan and Prescott w8622 The Stock Market Crash of 1929: Irving Fisher Was Right!
Farhi, Fraiberger, Gabaix, Ranciere, and Verdelhan w15062 Crash Risk in Currency Markets
Farmer w17479 The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence
White w12661 Anticipating the Stock Market Crash of 1929: The View from the Floor of the Stock Exchange
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us