Article1991

The Crash of ʼ87: Was It Expected? The Evidence from Options Markets

874 citations0/0 files storedThe Journal of Finance

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Stochastic processes and financial applications Financial Markets and Investment Strategies Financial Risk and Volatility Modeling

Abstract

ABSTRACT Transactions prices of S&P 500 futures options over 1985‐1987 are examined for evidence of expectations prior to October 1987 of an impending stock market crash. First, it is shown that out‐of‐the‐money puts became unusually expensive during the year preceding the crash. Second, a model is derived for pricing American options on jump‐diffusion processes with systematic jump risk. The jump‐diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during October 1986 to August 1987. Both approaches indicate no strong crash fears during the 2 months immediately preceding the crash.

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References

1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1985A Theory of the Term Structure of Interest Rates 1976Option pricing when underlying stock returns are discontinuous 1987The Pricing of Options on Assets with Stochastic Volatilities 1976The valuation of options for alternative stochastic processes 1982The stochastic behavior of common stock variances Value, leverage and interest rate effects 1985An Intertemporal General Equilibrium Model of Asset Prices 1982Bubbles, Rational Expectations and Financial Markets

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