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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)

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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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File URL: http://www.rcfea.org/RePEc/pdf/wp28_09.pdf
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Publisher Info
Paper provided by Rimini Centre for Economic Analysis in its series Working Paper Series with number wp28_09.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:rim:rimwps:wp28_09

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

Find related papers by JEL classification:
G1 - Financial Economics - - General Financial Markets
C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

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This page was last updated on 2009-11-4.

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