NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Crashes Develop: Intradaily Volatility and Crash Evolution

David S. Bates

NBER Working Paper No. 22028
Issued in February 2016
NBER Program(s):Asset Pricing

This paper explores whether affine models with volatility jumps estimated on intradaily S&P 500 futures data over 1983-2008 can capture major daily outliers such as the 1987 stock market crash. I find that intradaily jumps in futures prices are typically small, and that self-exciting but short-lived volatility spikes capture intradaily and daily returns better. Multifactor models of the evolution of diffusive variance and jump intensities improve fits substantially, including out-of-sample over 2009-13. The models capture reasonably well the conditional distributions of daily returns and of realized variance outliers, but underpredict realized variance inliers.

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Document Object Identifier (DOI): 10.3386/w22028

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