Explaining asset pricing puzzles associated with the 1987 market crash
The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic uncertainty are subject to rare jumps. The arrival of a jump triggers the updating of agents' beliefs about the likelihood of future jumps, which produces a market crash and a permanent shift in option prices. Consumption and dividends remain smooth, and the model is consistent with salient features of individual stock options, equity returns, and interest rates.
Year of publication: |
2011
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Authors: | Benzoni, Luca ; Collin-Dufresne, Pierre ; Goldstein, Robert S. |
Published in: |
Journal of Financial Economics. - Elsevier, ISSN 0304-405X. - Vol. 101.2011, 3, p. 552-573
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Publisher: |
Elsevier |
Keywords: | Volatility smile Volatility smirk Implied volatility Option pricing Portfolio insurance |
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