Super-Exponential Growth Expectations and the Global Financial Crisis

Matthias Leiss, Heinrich H. Nax and Didier Sornette
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Matthias Leiss: ETH Zurich
Heinrich H. Nax: ETH Zurich
Didier Sornette: ETH Zurich and Swiss Finance Institute

No 14-52, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We construct risk-neutral return probability distributions from S&P 500 options data over the decade 2003 to 2013, separable into pre-crisis, crisis and post-crisis regimes. The pre-crisis period is characterized by increasing realized and, especially, option-implied returns. This translates into transient unsustainable price growth that may be identified as a bubble. We evaluate a "real-minus-implied risk premium", defined as the difference between real and option-implied returns, which reveals a doubling of the risk-aversion of investors, from 8% in the pre-crisis to 16% in the post-crisis period. Granger causality tests demonstrate that changes of option-implied returns lead the changes of Treasury bill yields with a lag of a few days in the pre-crisis period, while the reverse is true with a lag of 50 to 200 days in the post-crisis period. This suggests a transition from an abnormal regime preceding the crisis to a "new normal" post-crisis.

Keywords: option-implied returns; super-exponential growth; expectations; financial bubble; financial crisis; real-minus-implied risk premium; Granger causality (search for similar items in EconPapers)
JEL-codes: C50 G01 G12 G17 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-08, Revised 2015-09
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1452

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