U.S. stock market crash risk, 1926–2010

David S. Bates

Journal of Financial Economics, 2012, vol. 105, issue 2, 229-259

Abstract: This paper examines how well alternate time-changed Lévy processes capture stochastic volatility and the substantial outliers observed in U.S. stock market returns over the past 85 years. The autocorrelation of daily stock market returns varies substantially over time, necessitating an additional state variable when analyzing historical data. I estimate various one- and two-factor stochastic volatility/Lévy models with time-varying autocorrelation via extensions of the Bates (2006) methodology that provide filtered daily estimates of volatility and autocorrelation. The paper explores option pricing implications, including for the Volatility Index (VIX) during the recent financial crisis.

Keywords: Lévy processes; Time-changed Lévy processes; Stock market crashes; Option pricing (search for similar items in EconPapers)
JEL-codes: C22 C46 G01 G13 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X12000414
Full text for ScienceDirect subscribers only

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:eee:jfinec:v:105:y:2012:i:2:p:229-259

DOI: 10.1016/j.jfineco.2012.03.004

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().