An Empirical Analysis of Equity Market Expectations in the Recent Financial Turmoil Using Implied Moments and Jump Diffusion Processes

Yoshihiko Sugihara and Nobuyuki Oda
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Yoshihiko Sugihara: Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yoshihiko.sugihara@boj.or.jp)
Nobuyuki Oda: Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nobuyuki.oda@boj.or.jp)

No 10-E-09, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper investigates market expectations of future equity prices using the probability distribution and the moments implied in equity option prices. We first conduct, without assuming a particular model, a nonparametric analysis of the development of market expectations in four major markets during the financial turmoil following the summer of 2007. We then conduct a parametric analysis to reconsider these expectations from the perspective of a stochastic process, assuming jump diffusion processes that configure the implied distribution. These analyses reveal that the possibility of discontinuous price jumps in each country increased downwards during the recent financial turmoil, while volatilities determining the dispersion of continuous price changes surged. Viewing the results from the perspective of a probability distribution, we find that kurtosis and the absolute value of skewness declined, while variance dramatically increased.

Keywords: implied distribution; implied moment; jump diffusion process; nonparametric method; GMM; characteristic function GMM (search for similar items in EconPapers)
JEL-codes: C13 C14 C16 G13 G15 (search for similar items in EconPapers)
Date: 2010-06
New Economics Papers: this item is included in nep-fmk
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