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

In: Recent Advances In Financial Engineering 2010

Author

Listed:
  • Yoshihiko Sugihara

    (Institute for Monetary and Economic Studies, Bank of Japan, 2-1-1 Nihombashi-Hongokucho, Chuo-ku, Tokyo 103-8660, Japan)

  • Nobuyuki Oda

    (Institute for Monetary and Economic Studies, Bank of Japan, 2-1-1 Nihombashi-Hongokucho, Chuo-ku, Tokyo 103-8660, Japan)

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 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, 2011. "An Empirical Analysis of Equity Market Expectations in the Financial Turmoil Using Implied Moments and Jump Diffusion Processes," World Scientific Book Chapters, in: Masaaki Kijima & Chiaki Hara & Yukio Muromachi & Hidetaka Nakaoka & Katsumasa Nishide (ed.), Recent Advances In Financial Engineering 2010, chapter 9, pages 181-213, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814366038_0009
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