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Post-’87 crash fears in the S&P 500 futures option market. (English) Zbl 0942.62118

Summary: Post-crash distributions inferred from S&P 500 future option prices have been strongly negatively skewed. This article examines two alternate explanations: stochastic volatility and jumps. The two option pricing models are nested, and are fitted to S&P 500 futures options data over 1988-1993. The stochastic volatility model requires extreme parameters (e.g., high volatility of volatility) that are implausible given the time series properties of option prices. The stochastic volatility/jump-diffusion model fits option prices better, and generates more plausible volatility process parameters. However, its implicit distributions are inconsistent with the absence of large stock index moves over 1988-93.

MSC:

62P05 Applications of statistics to actuarial sciences and financial mathematics
91B28 Finance etc. (MSC2000)
62P20 Applications of statistics to economics

Software:

astsa
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