Crash of '87 - Was it Expected? Aggregate Market Fears and Long Range Dependence

Ramazan Gencay and Nikola Gradojevic

Working Paper series from Rimini Centre for Economic Analysis

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)
JEL-codes: C40 G1 (search for similar items in EconPapers)
Date: 2009-01
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http://www.rcea.org/RePEc/pdf/wp28_09.pdf

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Journal Article: Crash of '87 -- Was it expected?: Aggregate market fears and long-range dependence (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:28_09

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