Financial market crashes and spikes in implied volatility

Research output: Working paper

Standard

Financial market crashes and spikes in implied volatility. / Zerilli, Paola Z; Baum, Christopher.

2012.

Research output: Working paper

Harvard

Zerilli, PZ & Baum, C 2012 'Financial market crashes and spikes in implied volatility'.

APA

Zerilli, P. Z., & Baum, C. (2012). Financial market crashes and spikes in implied volatility.

Vancouver

Zerilli PZ, Baum C. Financial market crashes and spikes in implied volatility. 2012.

Author

Zerilli, Paola Z ; Baum, Christopher. / Financial market crashes and spikes in implied volatility. 2012.

Bibtex - Download

@techreport{aec11a7ae0cb471a814f51f907ee8ca2,
title = "Financial market crashes and spikes in implied volatility",
abstract = "This paper proposes a new model for option pricing that can hold even in the event of a majorfinancial market crisis. When stock return volatility is unobservable, a good indicator for itsbehavior can be found in the volatility implied in the corresponding option market. S&P500implied volatility during the year 1987 was characterized by very sharp movements in bothdirections. Unlike existing models which only allow for dramatic increases in volatility, theproposed model allows the stock return volatility to wander about its path without anyrestrictions. This allows the volatility to either rise or fall violently while the entire processremains positive. Option pricing errors are used toestimate the risk premia embedded in the option prices. In the second stage, S&P500 optionprices are used to assess the empirical performance of the model via ex ante forecasts. Theestimates indicate that taking account of spikes in volatility significantly improves optionpricing.",
author = "Zerilli, {Paola Z} and Christopher Baum",
year = "2012",
language = "English",
type = "WorkingPaper",

}

RIS (suitable for import to EndNote) - Download

TY - UNPB

T1 - Financial market crashes and spikes in implied volatility

AU - Zerilli, Paola Z

AU - Baum, Christopher

PY - 2012

Y1 - 2012

N2 - This paper proposes a new model for option pricing that can hold even in the event of a majorfinancial market crisis. When stock return volatility is unobservable, a good indicator for itsbehavior can be found in the volatility implied in the corresponding option market. S&P500implied volatility during the year 1987 was characterized by very sharp movements in bothdirections. Unlike existing models which only allow for dramatic increases in volatility, theproposed model allows the stock return volatility to wander about its path without anyrestrictions. This allows the volatility to either rise or fall violently while the entire processremains positive. Option pricing errors are used toestimate the risk premia embedded in the option prices. In the second stage, S&P500 optionprices are used to assess the empirical performance of the model via ex ante forecasts. Theestimates indicate that taking account of spikes in volatility significantly improves optionpricing.

AB - This paper proposes a new model for option pricing that can hold even in the event of a majorfinancial market crisis. When stock return volatility is unobservable, a good indicator for itsbehavior can be found in the volatility implied in the corresponding option market. S&P500implied volatility during the year 1987 was characterized by very sharp movements in bothdirections. Unlike existing models which only allow for dramatic increases in volatility, theproposed model allows the stock return volatility to wander about its path without anyrestrictions. This allows the volatility to either rise or fall violently while the entire processremains positive. Option pricing errors are used toestimate the risk premia embedded in the option prices. In the second stage, S&P500 optionprices are used to assess the empirical performance of the model via ex ante forecasts. Theestimates indicate that taking account of spikes in volatility significantly improves optionpricing.

M3 - Working paper

BT - Financial market crashes and spikes in implied volatility

ER -