TY  - JOUR
AU  - Bates,David S.
TI  - The Market for Crash Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8557
PY  - 2001
Y2  - October 2001
UR  - http://www.nber.org/papers/w8557
L1  - http://www.nber.org/papers/w8557.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 examines the equilibrium when negative stock market jumps (crashes) can occur, and investors have heterogeneous attitudes towards crash risk.  The less crash-averse insure the more crash-averse through the options markets that dynamically complete the economy.  The resulting equilibrium is compared with various option pricing anomalies reported in the literature: the tendency of stock index options to overpredict volatility and jump risk, the Jackwerth (2000) implicit pricing kernel puzzle, and the stochastic evolution of option prices.  The specification of crash aversion is compatible with the static option pricing puzzles, while heterogeneity partially explains the dynamic puzzles.  Heterogeneity also magnifies substantially the stock market impact of adverse news about fundamentals.
ER  -