Journal of Financial Economics Vol. 101 No. 3 2011
Explaining asset pricing puzzles associated with the 1987 market crash
open access
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.
- DOI
- 10.1016/j.jfineco.2011.01.008
- Volume
- 101
- Issue
- 3
- Pages
- 552-573
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref