TY  - JOUR
AU  - Bates,David S.
TI  - U.S. Stock Market Crash Risk, 1926-2006
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14913
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14913
L1  - http://www.nber.org/papers/w14913.pdf
N1  - Author contact info:
David S. Bates
Henry B. Tippie College of Business
Department of Finance
University of Iowa
Iowa City, IA 52242-1000
Tel: 319/353-2288
Fax: 319/335-3690
E-Mail: david-bates@uiowa.edu
AB  - 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.
ER  -