1 option
The Market for Crash Risk / David S. Bates.
- Format:
- Book
- Author/Creator:
- Bates, David S.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w8557.
- NBER working paper series no. w8557
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2001.
- Summary:
- This paper examines the equilibrium when negative stock market jumps (crashes) can occur, and investors have heterogeneous attitudes towards crash risk. The less crash-averse insure the more crash-averse through the options markets that dynamically complete the economy. The resulting equilibrium is compared with various option pricing anomalies reported in the literature: the tendency of stock index options to overpredict volatility and jump risk, the Jackwerth (2000) implicit pricing kernel puzzle, and the stochastic evolution of option prices. The specification of crash aversion is compatible with the static option pricing puzzles, while heterogeneity partially explains the dynamic puzzles. Heterogeneity also magnifies substantially the stock market impact of adverse news about fundamentals.
- Notes:
- Print version record
- October 2001.
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