Abstract

http://ssrn.com/abstract=959547
 
 

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Crash of '87 - Was it Expected? Aggregate Market Fears and Long Range Dependence


Ramazan Gencay


Simon Fraser University

Nikola Gradojevic


IÉSEG School of Management; University of Bologna - Rimini Center for Economic Analysis (RCEA)

2006


Abstract:     
We develop a dynamic framework to identify aggregate market fears ahead of a major market crash through the skewness premium of European options. Our methodology is based on measuring the distribution of a skewness premium through a q-Gaussian density and a maximum entropy principle. Our findings indicate that the October 19th, 1987 crash was predictable from the study of the skewness premium of deepest out-of-the-money options about two months prior to the crash.

Number of Pages in PDF File: 23

Keywords: Non-additive Entropy, Shannon Entropy, Tsallis Entropy, q-Gaussian Distribution.

JEL Classification: G1, C40

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Date posted: January 27, 2007  

Suggested Citation

Gencay, Ramazan and Gradojevic, Nikola, Crash of '87 - Was it Expected? Aggregate Market Fears and Long Range Dependence (2006). Available at SSRN: http://ssrn.com/abstract=959547 or http://dx.doi.org/10.2139/ssrn.959547

Contact Information

Ramazan Gencay (Contact Author)
Simon Fraser University ( email )
Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
Nikola Gradojevic
IÉSEG School of Management ( email )
3, rue de la Digue
Lille, 59000
France
HOME PAGE: http://goo.gl/2mUIP
University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )
Via Patara, 3
Rimini (RN), RN 47900
Italy
Feedback to SSRN


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