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Crash of '87 : Was It Expected? The Evidence from Options Markets

Author: Inter-university Consortium for Political and Social Research.
Publisher: Ann Arbor, Mich. : Inter-university Consortium for Political and Social Research [distributor], 1999.
Series: ICPSR (Series), 1187.
Edition/Format:   Computer file : EnglishView all editions and formats
Database:WorldCat
Summary:
Efforts to explain why stock markets worldwide crashed in October 1987 have been frustrated by the scarcity of major economic developments occurring around that time that could have precipitated the crashes. It is conceivable that the United States stock market crashed because it was expected to crash. To test this hypothesis, transaction prices of Standard & Poor's 500 futures options over the 1985-1987 period were  Read more...
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Material Type: Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Inter-university Consortium for Political and Social Research.
OCLC Number: 61145827
Notes: Title from ICPSR DDI metadata of 2004-10-30.
Details: Mode of access: Intranet.
Series Title: ICPSR (Series), 1187.
Responsibility: David S. Bates.

Abstract:

Efforts to explain why stock markets worldwide crashed in October 1987 have been frustrated by the scarcity of major economic developments occurring around that time that could have precipitated the crashes. It is conceivable that the United States stock market crashed because it was expected to crash. To test this hypothesis, transaction prices of Standard & Poor's 500 futures options over the 1985-1987 period were examined for evidence prior to October 1987 of expectations of an impending crash. It was found that out-of-the-money puts became unusually expensive during the year leading up to the crash. A model was therefore derived for pricing American options on jump-diffusion processes with systematic jump risk. The jump-diffusion parameters implicit in option prices indicate that a crash was expected and that implicit distributions were negatively skewed for the October 1986-August 1987 period. Neither approach, however, points to any strong crash fears in the two months prior to the crash ... Cf.: http://dx.doi.org/10.3886/ICPSR01187.

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