NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Post-'87 Crash Fears in S&P 500 Futures Options

David S. Bates

NBER Working Paper No. 5894
Issued in January 1997
NBER Program(s):   AP

This paper shows that post-crash implicit distributions have been strongly negatively skewed, and examines two competing explanations: stochastic volatility models with negative correlations between market levels and volatilities, and negative-mean jump models with time-varying jump frequencies. The two models are nested using a Fourier inversion European option pricing methodology, and fitted to S&P 500 futures options data over 1988-1993 using a nonlinear generalized least squares/Kalman filtration methodology. While volatility and level shocks are substantially negatively correlated, the stochastic volatility model can explain the implicit negative skewness only under extreme parameters (e.g., high volatility of volatility) that are implausible given the time series properties of option prices. By contrast, the stochastic volatility/jump-diffusion model generates substantially more plausible parameter" estimates. Evidence is also presented against the hypothesis that volatility follows a diffusion.

download in pdf format
   (1994 K)

email paper

This paper is available as PDF (1994 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5894

Published: Journal of Econometrics, Vol. 94, nos. 1/2 (2000): 181-238.

Users who downloaded this paper also downloaded these:
Dumas, Fleming, and Whaley w5500 Implied Volatility Functions: Empirical Tests
Bates w5129 Testing Option Pricing Models
Aït-Sahalia and Lo w5351 Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices
Bates w4596 Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in thePHLX Deutschemark Options
Duffie, Pan, and Singleton w7105 Transform Analysis and Asset Pricing for Affine Jump-Diffusions
 
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