Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70565
Authors: 
Benzoni, Luca
Collin-Dufresne, Pierre
Goldstein, Robert S.
Year of Publication: 
2010
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2010-10
Abstract: 
The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic uncertainty are subject to rare jumps. The arrival of a jump triggers the updating of agents' beliefs about the likelihood of future jumps, which produces a market crash and a permanent shift in option prices. Consumption and dividends remain smooth, and the model is consistent with salient features of individual stock options, equity returns, and interest rates.
Subjects: 
Volatility Smile
Volatility Smirk
Implied Volatility
Option Pricing
Portfolio Insurance
Market Risk
JEL: 
G12
G13
Document Type: 
Working Paper

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