TY - JOUR
T1 - Explaining asset pricing puzzles associated with the 1987 market crash
AU - Benzoni, Luca
AU - Collin-Dufresne, Pierre
AU - Goldstein, Robert S.
PY - 2011/9
Y1 - 2011/9
N2 - 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.
AB - 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.
KW - Implied volatility
KW - Option pricing
KW - Portfolio insurance
KW - Volatility smile
KW - Volatility smirk
UR - http://www.scopus.com/inward/record.url?scp=79960397006&partnerID=8YFLogxK
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U2 - 10.1016/j.jfineco.2011.01.008
DO - 10.1016/j.jfineco.2011.01.008
M3 - Article
AN - SCOPUS:79960397006
SN - 0304-405X
VL - 101
SP - 552
EP - 573
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -