U.S. Stock Market Crash Risk, 1926-2006

57 Pages Posted: 29 Apr 2009 Last revised: 2 Oct 2022

See all articles by David S. Bates

David S. Bates

University of Iowa - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: April 2009

Abstract

This paper applies the Bates (RFS, 2006) methodology to the problem of estimating and filtering time- changed Lévy processes, using daily data on U.S. stock market excess returns over 1926-2006. In contrast to density-based filtration approaches, the methodology recursively updates the associated conditional characteristic functions of the latent variables. The paper examines how well time-changed Lévy specifications capture stochastic volatility, the "leverage" effect, and the substantial outliers occasionally observed in stock market returns. The paper also finds that the autocorrelation of stock market excess returns varies substantially over time, necessitating an additional latent variable when analyzing historical data on stock market returns. The paper explores option pricing implications, and compares the results with observed prices of options on S&P 500 futures.

Suggested Citation

Bates, David S., U.S. Stock Market Crash Risk, 1926-2006 (April 2009). NBER Working Paper No. w14913, Available at SSRN: https://ssrn.com/abstract=1394820

David S. Bates (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States
319-353-2288 (Phone)
319-335-3690 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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