Revisiting derivative securities and the 1987 market crash: lessons for 2009
Purpose – The purpose of this paper is to examine the role of derivative securities in over-pricing and market corrections. Design/methodology/approach – Daily market data from major indices are used to determine if the market was over-priced in 1987. Then, the literature is examined to show differences in research findings for what caused the bubble and its correction. Findings – Evidence is found that there was a market bubble in 1987. Examples are provided of how portfolio insurance can lead to the aggregation of traders' idiosyncratic errors and to an increase in the use of leverage, both of which can cause over-pricing. Research limitations/implications – Although the analysis is limited to equity markets, the findings should stimulate further research on the relationship between derivatives and asset pricing. Theoretically, derivative prices should be a function of asset prices, but it could be argued that the relationship is symbiotic. Practical implications – The findings may impact policy makers in establishing regulations regarding the use of derivatives. Moreover, asset managers may be able to better detect conditions of over-pricing. Originality/value – The paper demonstrates the important role of derivative securities in market prices.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 8 (2009)
Issue (Month): 2 (May)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=raf Email:
When requesting a correction, please mention this item's handle: RePEc:eme:rafpps:v:8:y:2009:i:2:p:176-186. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)
If references are entirely missing, you can add them using this form.