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Crash of ’87 - Was it Expected? Aggregate Market Fears and Long Range Dependence

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Author Info

  • Ramazan Gencay

    ()
    ( Department of Economics, Simon Fraser University)

  • Nikola Gradojevic

    ()
    ( Faculty of Business Administration, Lakehead University)

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

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 28_09.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:rim:rimwps:28_09

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Keywords: Non-additive Entropy; Shannon Entropy; Tsallis Entropy; q-Gaussian Distribution; Skewness Premium;

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Cited by:
  1. 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.
  2. 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.

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