An Empirical Analysis of Equity Market Expectations in the Financial Turmoil Using Implied Moments and Jump Diffusion Processes

Yoshihiko Sugihara and Nobuyuki Oda
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Yoshihiko Sugihara: Institute for Monetary and Economic Studies, Bank of Japan, 2-1-1 Nihombashi-Hongokucho, Chuo-ku, Tokyo 103-8660, Japan
Nobuyuki Oda: Institute for Monetary and Economic Studies, Bank of Japan, 2-1-1 Nihombashi-Hongokucho, Chuo-ku, Tokyo 103-8660, Japan

Chapter 9 in Recent Advances in Financial Engineering 2010, 2011, pp 181-213 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper investigates market expectations of future equity prices using the probability distribution and the moments implied in equity option prices. We first conduct, without assuming a particular model, a nonparametric analysis of the development of market expectations in four major markets during the financial turmoil following the summer of 2007. We then conduct a parametric analysis to reconsider these expectations from the perspective of a stochastic process, assuming jump diffusion processes that configure the implied distribution. These analyses reveal that the possibility of discontinuous price jumps in each country increased downwards during the turmoil, while volatilities determining the dispersion of continuous price changes surged. Viewing the results from the perspective of a probability distribution, we find that kurtosis and the absolute value of skewness declined, while variance dramatically increased.

Keywords: Operations Research; Financial Engineering; Management; Mathematical Modeling; Credit Risk; Real Options; Optimal Investment; Heterogeneous Beliefs (search for similar items in EconPapers)
Date: 2011
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