U.S. Stock Market Crash Risk, 1926-2006 / David S. Bates.

Format:

Book

Author/Creator:

Bates, David S.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14913.

NBER working paper series no. w14913

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

This paper applies the Bates (RFS, 2006) methodology to the problem of estimating and filtering time- changed Lévy processes, using daily data on U.S. stock market excess returns over 1926-2006. In contrast to density-based filtration approaches, the methodology recursively updates the associated conditional characteristic functions of the latent variables. The paper examines how well time-changed Lévy specifications capture stochastic volatility, the "leverage" effect, and the substantial outliers occasionally observed in stock market returns. The paper also finds that the autocorrelation of stock market excess returns varies substantially over time, necessitating an additional latent variable when analyzing historical data on stock market returns. The paper explores option pricing implications, and compares the results with observed prices of options on S&P 500 futures.

Notes:

Print version record

April 2009.