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U.S. stock market crash risk, 1926–2010

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  • Bates, David S.

Abstract

This paper examines how well alternate time-changed Lévy processes capture stochastic volatility and the substantial outliers observed in U.S. stock market returns over the past 85 years. The autocorrelation of daily stock market returns varies substantially over time, necessitating an additional state variable when analyzing historical data. I estimate various one- and two-factor stochastic volatility/Lévy models with time-varying autocorrelation via extensions of the Bates (2006) methodology that provide filtered daily estimates of volatility and autocorrelation. The paper explores option pricing implications, including for the Volatility Index (VIX) during the recent financial crisis.

Suggested Citation

  • Bates, David S., 2012. "U.S. stock market crash risk, 1926–2010," Journal of Financial Economics, Elsevier, vol. 105(2), pages 229-259.
    • Handle: RePEc:eee:jfinec:v:105:y:2012:i:2:p:229-259
    DOI: 10.1016/j.jfineco.2012.03.004
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    More about this item

    Keywords

    Lévy processes; Time-changed Lévy processes; Stock market crashes; Option pricing;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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