How Crashes Develop: Intradaily Volatility and Crash Evolution

This paper explores whether affine models with volatility jumps estimated on intradaily S&P 500 futures data over 1983 to 2008 can capture major daily outliers such as the 1987 stock market crash. Intradaily jumps in futures prices are typically small; self-exciting but short-lived volatility sp...

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Bibliographic Details
Published in:The Journal of finance (New York) Vol. 74; no. 1; pp. 193 - 238
Main Author: BATES, DAVID S.
Format: Journal Article
Language:English
Published: Cambridge Wiley Periodicals, Inc 01.02.2019
Blackwell Publishers Inc
Subjects:
Futures
Prices
Securities markets
Stock exchanges
Stock market crashes
Volatility
ISSN:0022-1082, 1540-6261
Online Access:Get full text
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Summary:This paper explores whether affine models with volatility jumps estimated on intradaily S&P 500 futures data over 1983 to 2008 can capture major daily outliers such as the 1987 stock market crash. Intradaily jumps in futures prices are typically small; self-exciting but short-lived volatility spikes capture intradaily and daily returns better. Multifactor models of the evolution of diffusive variance and jump intensities improve fits substantially, including out-of-sample over 2009 to 2016. The models capture reasonably well the conditional distributions of daily returns and realized variance outliers, but underpredict realized variance inliers. I also examine option pricing implications.
Bibliography:David Bates is with the University of Iowa and the National Bureau of Economic Research. I am grateful for comments on earlier versions of the paper from seminar participants at Iowa, Northwestern, Houston, Lugano, and the Collegio Carlo Alberto and from conference participants at the 2012 IFSID Conference on Structured Products and Derivatives, McGill University's 2014 Risk Management Conference, the 2016 FMA/CBOE Conference on Volatility and Derivatives, and the 2017 annual conferences of the Midwest Finance Association and Society for Financial Econometrics. I have read the
Journal of Finance
s disclosure policy and have no conflicts of interest to disclose.
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ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12732