U.S. Stock Market Crash Risk, 1926-2006

David S. Bates

No 14913, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: C22 C46 G1 G13 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-bec, nep-fmk and nep-rmg
Note: AP
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Citations: View citations in EconPapers (2)

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