The Crash of '87: Was It Expected? The Evidence from Options Markets

David S Bates

Journal of Finance, 1991, vol. 46, issue 3, 1009-44

Abstract: Transactions prices of S&P 500 futures options over 1985-87 are examined for evidence of expectations prior to October 1987 of an impending stock market crash. First, it is shown that out-of-the-money puts became unusually expensive during the year preceding the crash. Second, a model is derived for pricing American options on jump-diffusion processes with systematic jump risk. The jump-diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during October 1986 to August 1987. Both approaches indicate no strong crash fears during the 2 months immediately preceding the crash. Copyright 1991 by American Finance Association.

Date: 1991
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