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The Enron Bankruptcy: When did the options market in Enron lose it’s smirk?

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Author Info

  • Bruce Mizrach

Abstract

The Enron Corporation went from a $65 billion dollar market capitalization to bankruptcy in just 16 months. Using statistical techniques for extracting the implied probability distributions built into option prices, I examine the market’s expectation of Enron’s risk of collapse. I find that the options market remained far too optimistic about the stock until just weeks before their bankruptcy filing. Copyright Springer Science + Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s11156-006-0043-2
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Bibliographic Info

Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 27 (2006)
Issue (Month): 4 (December)
Pages: 365-382

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Handle: RePEc:kap:rqfnac:v:27:y:2006:i:4:p:365-382

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Web page: http://springerlink.metapress.com/link.asp?id=102990

Related research

Keywords: Volatility smile; Options; Enron; Bankruptcy;

References

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  1. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. " Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-20, June.
  2. Bjerksund, Petter & Stensland, Gunnar, 1993. "Closed-form approximation of American options," Scandinavian Journal of Management, Elsevier, vol. 9(Supplemen), pages S87-S99.
  3. Das, Sanjiv Ranjan & Sundaram, Rangarajan K., 1999. "Of Smiles and Smirks: A Term Structure Perspective," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(02), pages 211-239, June.
  4. Skouras, Spyros, 2007. "Decisionmetrics: A decision-based approach to econometric modelling," Journal of Econometrics, Elsevier, vol. 137(2), pages 414-440, April.
  5. Stein, Elias M & Stein, Jeremy C, 1991. "Stock Price Distributions with Stochastic Volatility: An Analytic Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 727-52.
  6. Hansen Bruce E., 1997. "Inference in TAR Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(1), pages 1-16, April.
  7. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
  8. Markus Haas & Stefan Mittnik & Bruce Mizrach, 2004. "Assessing Central Bank Credibility During the EMS Crises: Comparing Option and Spot Market-Based Forecasts," Departmental Working Papers 200424, Rutgers University, Department of Economics.
  9. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
  10. Peter Christoffersen & Kris Jacobs, 2001. "The Importance of the Loss Function in Option Pricing," CIRANO Working Papers 2001s-45, CIRANO.
  11. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
  12. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December.
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Cited by:
  1. Bruce Mizrach, 2007. "Recovering Probabilistic Information From Options Prices and the Underlying," Departmental Working Papers 200702, Rutgers University, Department of Economics.
  2. Ehret, Michael, 2014. "Financial socialism: The role of financial economics in economic disorganization," Journal of Business Research, Elsevier, vol. 67(1), pages 2686-2692.

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