The Wharton School, University of Pennsylvania. Financial support from the National Science Foundation, grant #SES-8921059, and from the University of Pennsylvania Junior Faculty Research Fund is gratefully acknowledged.
The Crash of '87: Was It Expected? The Evidence from Options Markets
Article first published online: 30 APR 2012
1991 The American Finance Association
The Journal of Finance
Volume 46, Issue 3, pages 1009–1044, July 1991
How to Cite
BATES, D. S. (1991), The Crash of '87: Was It Expected? The Evidence from Options Markets. The Journal of Finance, 46: 1009–1044. doi: 10.1111/j.1540-6261.1991.tb03775.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Transactions prices of S&P 500 futures options over 1985–1987 are examined for evidence of expectations prior to October 1987 of an impending stock market crash. First, it is shown that out-of-the-money puts became unusually expensive during the year preceding the crash. Second, a model is derived for pricing American options on jump-diffusion processes with systematic jump risk. The jump-diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during October 1986 to August 1987. Both approaches indicate no strong crash fears during the 2 months immediately preceding the crash.