Super-exponential growth expectations and the global financial crisis

Matthias Leiss, Heinrich H. Nax and Didier Sornette

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We construct risk-neutral return probability distributions from S&P 500 options data over the decade 2003–2013, 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. Granger tests detect causality running from option-implied returns to Treasury Bill yields in the pre-crisis regime with a lag of a few days, and the other way round during the post-crisis regime with much longer lags (50–200 days). This suggests a transition from an abnormal regime preceding the crisis to a “new normal” post-crisis. The difference between realized and option-implied returns remains roughly constant prior to the crisis but diverges in the post-crisis phase, which may be interpreted as an increase of the representative investor׳s risk aversion.

Keywords: financial crisis; returns; expectations; options; risk-neutral densities (search for similar items in EconPapers)
JEL-codes: D84 G13 G14 (search for similar items in EconPapers)
Date: 2015-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Published in Journal of Economic Dynamics and Control, June, 2015, 55, pp. 1-13. ISSN: 0165-1889

Downloads: (external link)
http://eprints.lse.ac.uk/65434/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:65434

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().