The authors provide new evidence regarding the degree of integration among markets for stocks, futures, and options prior to and during the October 1987 market crash. Where previous analyses have resulted in recommendations for the implementation of circuit breakers, the coordination of margin requirements across markets, and changes in regulatory jurisdiction, their analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock-market orders. The results suggest that market integration may be better served by efficient order execution than by further restricting markets.

We provide new evidence regarding the degree of integration among markets for stocks, futures and options prior to and during the October 1987 market crash. Where previous analyses have resulted in recommendations for the implementation of circuit breakers, the coordination of margin requirements across markets, and changes in regulatory jurisdiction, our analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock market orders. The results suggest that market integration may be better served by efficient order execution than by further restricting markets. To a large extent, the problems of mid‐October can be traced to the failure of these market segments [stocks, stock index futures, and stock options] to act as one. (Report of the Presidential Task Force [Brady Report] (1988, Executive Summary, p. vi)).

Most models of market volatility use either past returns or ex post volatility to forecast volatility. In this paper, the dynamic behavior of market volatility is assessed by forecasting the volatility implied in the transaction prices of Standard & Poor's 100 index options. We test and reject the hypothesis that volatility changes are unpredictable. However, while our statistical model delivers precise forecasts, abnormal returns are not possible in a trading strategy (based on daily out-of-sample volatility projections) which takes transaction costs into account, suggesting that predictable time-varying volatility is consistent with market efficiency.