The Financial Crisis and the Behavior of S&P 500 Index Option Prices
48 Pages Posted: 12 Oct 2014 Last revised: 29 Aug 2015
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: Suggested Citation