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Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008


  • Birru, Justin
  • Figlewski, Stephen


We examine the risk neutral probability density (RND) for the S&P 500 extracted from real-time bid and ask quotes for index options, under extreme market stress during the fall of 2008. The RND provides exceptional detail about investors' expectations as intraday volatility increased to a level five times higher than it had been two years earlier. Arbitrage keeps the mean of the RND closely tied to the market index, but its autocorrelation is very different. We also find a strong pattern in the RND's response to stock index movements: The middle portion amplifies the index change by more than 50% in some cases. This overshooting increased during the crisis and, surprisingly, was stronger in up moves than down moves.

Suggested Citation

  • Birru, Justin & Figlewski, Stephen, 2012. "Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008," Journal of Financial Markets, Elsevier, vol. 15(2), pages 151-180.
  • Handle: RePEc:eee:finmar:v:15:y:2012:i:2:p:151-180
    DOI: 10.1016/j.finmar.2011.09.001

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    References listed on IDEAS

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    Cited by:

    1. Gagnon, Marie-Hélène & Power, Gabriel J. & Toupin, Dominique, 2016. "International stock market cointegration under the risk-neutral measure," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 243-255.
    2. Chatrath, Arjun & Christie-David, Rohan A. & Miao, Hong & Ramchander, Sanjay, 2015. "Short-term options: Clienteles, market segmentation, and event trading," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 237-250.
    3. Lina M. Cortés & Javier Perote & Andrés Mora-Valencia, 2017. "Implicit probability distribution for WTI options: The Black Scholes vs. the semi-nonparametric approach," DOCUMENTOS DE TRABAJO CIEF 015923, UNIVERSIDAD EAFIT.

    More about this item


    Risk neutral density; Implied probabilities; Stock index options; 2008 financial crisis;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations


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