The Financial Crisis and the Behavior of S&P 500 Index Option Prices

48 Pages Posted: 12 Oct 2014 Last revised: 29 Aug 2015

See all articles by Mo Chaudhury

Mo Chaudhury

McGill University - Desautels Faculty of Management

Date Written: August 27, 2015

Abstract

Stronger volatility skew and smile effects accompanied by a risk-neutral distribution that is closer to the Normal seem unconventional at first thought. But that is what we find during the financial crisis, with the unconventionally high risk-neutral volatility level playing a major role. Additionally, the term structure of implied volatility became inverted (negatively sloped) during the crisis, driven by the inversion of the term structure of risk-neutral volatility and by the rise in the shorter term unconditional volatility. The term structures of risk-neutral skewness and kurtosis appear relatively flat with only negligible change during the crisis. The scale and its term structure rather than the shape factors of the unconditional risk neutral distribution to maturity thus appear more important for the structure of crisis time option prices.

Keywords: Financial Crisis, Behavior of Stock Price, Volatility Smile, Value at Risk

JEL Classification: G12, G01, G13, G21

Suggested Citation

Chaudhury, Mo, The Financial Crisis and the Behavior of S&P 500 Index Option Prices (August 27, 2015). Available at SSRN: https://ssrn.com/abstract=2508464 or http://dx.doi.org/10.2139/ssrn.2508464

Mo Chaudhury (Contact Author)

McGill University - Desautels Faculty of Management ( email )

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HOME PAGE: http://www.mcgill.ca/desautels/mo-chaudhury

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