Crash of '87 -- Was it expected?: Aggregate market fears and long-range dependence

Ramazan Gencay and Nikola Gradojevic

Journal of Empirical Finance, 2010, vol. 17, issue 2, 270-282

Abstract: We develop a dynamic framework to identify aggregate market fears ahead of a major market crash through the skewness premium of European options. Our methodology is based on measuring the distribution of a skewness premium through a q-Gaussian density and a maximum entropy principle. Our findings indicate that the October 19th, 1987 crash was predictable from the study of the skewness premium of deepest out-of-the-money options about two months prior to the crash.

Keywords: Non-additive; entropy; Shannon; entropy; Tsallis; entropy; q-Gaussian; distribution; Skewness; premium (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (13)

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Working Paper: Crash of '87 - Was it Expected? Aggregate Market Fears and Long Range Dependence (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:17:y:2010:i:2:p:270-282

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