Super-exponential growth expectations and the global financial crisis |
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Institution: | 1. School of Business, Central South University, Changsha 410083, China;2. School of public administration, Central South University, Changsha 410083, China;3. Washington University, One Brookings Drive, St. Louis, MO 63130, United States;4. Supply Chain and Logistics Optimization Research Centre, Faculty of Engineering, University of Windsor, Windsor, ON, Canada;5. Centre for Computational Finance and Economic Agents, University of Essex, Colchester CO4 3SQ, UK |
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Abstract: | We construct risk-neutral return probability distributions from S&P 500 options data over the decade 2003–2013, separable into pre-crisis, crisis and post-crisis regimes. The pre-crisis period is characterized by increasing realized and, especially, option-implied returns. This translates into transient unsustainable price growth that may be identified as a bubble. Granger tests detect causality running from option-implied returns to Treasury Bill yields in the pre-crisis regime with a lag of a few days, and the other way round during the post-crisis regime with much longer lags (50–200 days). This suggests a transition from an abnormal regime preceding the crisis to a “new normal” post-crisis. The difference between realized and option-implied returns remains roughly constant prior to the crisis but diverges in the post-crisis phase, which may be interpreted as an increase of the representative investor?s risk aversion. |
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Keywords: | Financial crisis Returns Expectations Options Risk-neutral densities |
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