How Crashes Develop: Intradaily Volatility and Crash Evolution

David S. Bates

Journal of Finance, 2019, vol. 74, issue 1, 193-238

Abstract: This paper explores whether affine models with volatility jumps estimated on intradaily S&P 500 futures data over 1983 to 2008 can capture major daily outliers such as the 1987 stock market crash. Intradaily jumps in futures prices are typically small; self‐exciting but short‐lived volatility spikes capture intradaily and daily returns better. Multifactor models of the evolution of diffusive variance and jump intensities improve fits substantially, including out‐of‐sample over 2009 to 2016. The models capture reasonably well the conditional distributions of daily returns and realized variance outliers, but underpredict realized variance inliers. I also examine option pricing implications.

Date: 2019
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https://doi.org/10.1111/jofi.12732

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:74:y:2019:i:1:p:193-238

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