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Primary Article

Crash–O–Phobia

A Domestic Fear or a Worldwide Concern?

Silverio Foresi and Liuren Wu
The Journal of Derivatives Winter 2005, 13 (2) 8-21; DOI: https://doi.org/10.3905/jod.2005.605352
Silverio Foresi
A managing director at Goldman Sachs, New York.
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  • For correspondence: silverio.foresi@gs.com
Liuren Wu
An associate professor of finance at the Zicklin School of Business, Baruch College, City University of New York.
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  • For correspondence: liuren_wu@baruch.cuny.edu
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Abstract

From a large options data set on major equity indexes across the world, the authors find that worldwide, implied volatilities of options on equity indexes exhibit strikingly similar behaviors. When plotted against moneyness, implied volatilities show a heavily skewed smirk pattern, implying that out–of–the–money put options are more expensive than the corresponding out–of–the–money call options and that the risk–neutral return distribution for these indexes is heavily negatively skewed. Furthermore, as the option maturity increases from one month to five years, the implied volatility smirk does not flatten out but steepens, indicating that the risk–neutral distribution of equity index returns becomes even more negatively skewed at longer horizons. The average term structure of the implied volatility level is relatively flat, and the standard deviation of the implied volatility declines as maturity increases. Although fairly persistent, the implied volatility series are stationary. Finally, principal component analysis reveals that equity index volatility movements across the world share one global component.

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The Journal of Derivatives
Vol. 13, Issue 2
Winter 2005
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Crash–O–Phobia
Silverio Foresi, Liuren Wu
The Journal of Derivatives Nov 2005, 13 (2) 8-21; DOI: 10.3905/jod.2005.605352

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Crash–O–Phobia
Silverio Foresi, Liuren Wu
The Journal of Derivatives Nov 2005, 13 (2) 8-21; DOI: 10.3905/jod.2005.605352
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