Pierre Collin-Dufresne

Explaining Asset Pricing Puzzles Associated with the 1987 Market Crash

Coauthor(s): Luca Benzoni, Robert Goldstein.

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Abstract:

The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic uncertainty are subject to rare jumps. The arrival of a jump triggers the updating of agents' beliefs about the likelihood of future jumps, which produces a market crash and a permanent shift in option prices. Consumption and dividends remain smooth, and the model is consistent with salient features of individual stock options, equity returns, and interest rates.

The PDF above is a preprint version of the article. The final version may be found at < http://dx.doi.org/10.1016/j.jfineco.2011.01.008 >.

Source: Journal of Financial Economics
Exact Citation:
Collin-Dufresne, Pierre, Luca Benzoni, and Robert Goldstein. "Explaining Asset Pricing Puzzles Associated with the 1987 Market Crash." Journal of Financial Economics 101, no. 3 (September 2011): 552-573.
Volume: 101
Number: 3
Pages: 552-573
Date: 9 2011