Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008

Justin Birru and Stephen Figlewski

Journal of Financial Markets, 2012, vol. 15, issue 2, 151-180

Abstract: We examine the risk neutral probability density (RND) for the S&P 500 extracted from real-time bid and ask quotes for index options, under extreme market stress during the fall of 2008. The RND provides exceptional detail about investors' expectations as intraday volatility increased to a level five times higher than it had been two years earlier. Arbitrage keeps the mean of the RND closely tied to the market index, but its autocorrelation is very different. We also find a strong pattern in the RND's response to stock index movements: The middle portion amplifies the index change by more than 50% in some cases. This overshooting increased during the crisis and, surprisingly, was stronger in up moves than down moves.

Keywords: Risk neutral density; Implied probabilities; Stock index options; 2008 financial crisis (search for similar items in EconPapers)
JEL-codes: D84 G13 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:15:y:2012:i:2:p:151-180

DOI: 10.1016/j.finmar.2011.09.001

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