Post-'87 crash fears in the S&P 500 futures option market

Abstract

Post-crash distributions inferred from S&P 500 future option prices have been strongly negatively skewed. This article examines two alternate explanations: stochastic volatility and jumps. The two option pricing models are nested, and are fitted to S&P 500 futures options data over 1988-1993. The stochastic volatility model requires extreme parameters (e.g., high volatility of volatility) that are implausible given the time series properties of option prices. The stochastic volatility/jump-diffusion model fits option prices better, and generates more plausible volatility process parameters. However, its implicit distributions are inconsistent with the absence of large stock index moves over 1988-93. © 2000 Elsevier Science S.A. All rights reserved.