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Crash of '87 -- Was it expected?: Aggregate market fears and long-range dependence

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  • Gençay, Ramazan
  • Gradojevic, Nikola

Abstract

We develop a dynamic framework to identify aggregate market fears ahead of a major market crash through the skewness premium of European options. Our methodology is based on measuring the distribution of a skewness premium through a q-Gaussian density and a maximum entropy principle. Our findings indicate that the October 19th, 1987 crash was predictable from the study of the skewness premium of deepest out-of-the-money options about two months prior to the crash.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 17 (2010)
Issue (Month): 2 (March)
Pages: 270-282

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Handle: RePEc:eee:empfin:v:17:y:2010:i:2:p:270-282

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Non-additive entropy Shannon entropy Tsallis entropy q-Gaussian distribution Skewness premium;

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Cited by:
  1. Namaki, A. & Koohi Lai, Z. & Jafari, G.R. & Raei, R. & Tehrani, R., 2013. "Comparing emerging and mature markets during times of crises: A non-extensive statistical approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(14), pages 3039-3044.
  2. Alvarez-Ramirez, J. & Rodriguez, E. & Espinosa-Paredes, G., 2012. "A partisan effect in the efficiency of the US stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(20), pages 4923-4932.

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