TY - JOUR
AU - Bates, David S
TI - Post-'87 Crash Fears in S&P 500 Futures Options
JF - National Bureau of Economic Research Working Paper Series
VL - No. 5894
PY - 1997
Y2 - January 1997
DO - 10.3386/w5894
UR - http://www.nber.org/papers/w5894
L1 - http://www.nber.org/papers/w5894.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 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.
ER -