U.S. stock market crash risk, 1926–2010

U.S. stock market crash risk, 1926–2010

This paper examines how well alternate time-changed Levy processes capture stochastic volatility and the substantial outliers observed in U.S. stock market returns over the past 85 years. The autocorrelation of daily stock market returns varies substantially over time, necessitating an additional st...

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Veröffentlicht in:Journal of financial economics 2012-08, Vol.105 (2), p.229-259
1. Verfasser: Bates, David S
Format: Artikel
Sprache:eng
Schlagworte:
Correlation
Correlation analysis
Financial crisis
Financial history
Indexing in process
Lévy, Paul
Option pricing
Probability distribution
Rates of return
Securities markets
Stochastic models
Stochastic processes
Stock exchange
Stock market crashes
Stock returns
Studies
Time series
U.S.A
Volatility
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Zusammenfassung:This paper examines how well alternate time-changed Levy processes capture stochastic volatility and the substantial outliers observed in U.S. stock market returns over the past 85 years. The autocorrelation of daily stock market returns varies substantially over time, necessitating an additional state variable when analyzing historical data. I estimate various one- and two-factor stochastic volatility/Levy models with time-varying autocorrelation via extensions of the Bates (2006) methodology that provide filtered daily estimates of volatility and autocorrelation. The paper explores option pricing implications, including for the Volatility Index (VIX) during the recent financial crisis. [PUBLICATION ABSTRACT]
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2012.03.004