Crash of '87 -- Was it expected?: Aggregate market fears and long-range dependence
AbstractWe 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 InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 17 (2010)
Issue (Month): 2 (March)
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Web page: http://www.elsevier.com/locate/jempfin
Non-additive entropy Shannon entropy Tsallis entropy q-Gaussian distribution Skewness premium;
Other versions of this item:
- Ramazan Gencay & Nikola Gradojevic, 2009. "Crash of ’87 - Was it Expected? Aggregate Market Fears and Long Range Dependence," Working Paper Series 28_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
- G1 - Financial Economics - - General Financial Markets
- C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
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- 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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