Super-exponential growth expectations and the global financial crisis

Leiss, Matthias, Nax, Heinrich H. and Sornette, Didier (2015) Super-exponential growth expectations and the global financial crisis. Journal of Economic Dynamics and Control, 55. pp. 1-13. ISSN 0165-1889

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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.

Item Type:	Article
Official URL:	http://www.journals.elsevier.com/journal-of-econom...
Additional Information:	© 2015 Elsevier B.V.
Divisions:	CPNSS
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations; Speculations G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Date Deposited:	19 Feb 2016 16:37
Last Modified:	12 Dec 2024 00:59
Projects:	Advanced Investigator Grant Momentum 324247
Funders:	European Research Council, ETH Zurich Risk Center
URI:	http://eprints.lse.ac.uk/id/eprint/65434

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