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

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Author Info
 Bates, David S
Abstract

Transactions prices of S&P 500 futures options over 1985-87 are examined for evidence of expectations prior to October 1987 of an impending stock market crash. First, it is shown that out-of-the-money puts became unusually expensive during the year preceding the crash. Second, a model is derived for pricing American options on jump-diffusion processes with systematic jump risk. The jump-diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during October 1986 to August 1987. Both approaches indicate no strong crash fears during the 2 months immediately preceding the crash. Copyright 1991 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 46 (1991)
Issue (Month): 3 (July)
Pages: 1009-44
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Handle: RePEc:bla:jfinan:v:46:y:1991:i:3:p:1009-44

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