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An Empirical Analysis of Equity Market Expectations in the Recent Financial Turmoil Using Implied Moments and Jump Diffusion Processes

Author

Listed:
  • Yoshihiko Sugihara

    (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yoshihiko.sugihara@boj.or.jp))

  • Nobuyuki Oda

    (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nobuyuki.oda@boj.or.jp))

Abstract

This paper investigates market expectations of future equity prices using the probability distribution and the moments implied in equity option prices. We first conduct, without assuming a particular model, a nonparametric analysis of the development of market expectations in four major markets during the financial turmoil following the summer of 2007. We then conduct a parametric analysis to reconsider these expectations from the perspective of a stochastic process, assuming jump diffusion processes that configure the implied distribution. These analyses reveal that the possibility of discontinuous price jumps in each country increased downwards during the recent financial turmoil, while volatilities determining the dispersion of continuous price changes surged. Viewing the results from the perspective of a probability distribution, we find that kurtosis and the absolute value of skewness declined, while variance dramatically increased.

Suggested Citation

  • Yoshihiko Sugihara & Nobuyuki Oda, 2010. "An Empirical Analysis of Equity Market Expectations in the Recent Financial Turmoil Using Implied Moments and Jump Diffusion Processes," IMES Discussion Paper Series 10-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:10-e-09
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    File URL: http://www.imes.boj.or.jp/research/papers/english/10-E-09.pdf
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    References listed on IDEAS

    as
    1. Yacine Aït-Sahalia & Michael W. Brandt, 2008. "Consumption and Portfolio Choice with Option-Implied State Prices," NBER Working Papers 13854, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    implied distribution; implied moment; jump diffusion process; nonparametric method; GMM; characteristic function GMM;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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