market impacts in major events: an analysis using state price distributions
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Market Impacts in Major Events: An Analysis Using State Price Distributions. Ph.D. Dissertation Proposal Merlyn Foo [email protected] March 28, 2008. Purpose of study. A better understanding of characteristics of aggregate market reactions during major events in terms of - PowerPoint PPT PresentationTRANSCRIPT
Market Impacts in Major Events: An Analysis Using State Price DistributionsPh.D. Dissertation Proposal
Merlyn [email protected]
March 28, 2008
Purpose of study A better understanding of characteristics
of aggregate market reactions during major events in terms of information leakage impact duration impact size
Differences of reactions in different markets during different events
Which Events?
1998: Long Term Capital Management collapse
2000: Tech-Bubble Burst
2001: September 11
Why these 3 events?
They are three of the largest events in the last decade
They occurred at three different levels of the economy:LTCM: organizational level2000-Burst: industry level9/11: national and global levels
Which markets?
S&P 500 calls (SPX calls) S&P 500 puts (SPX puts) Nasdaq 100 calls (NDX calls) Nasdaq 100 puts (NDX puts)
Which time period?
Event dates are hard to pin down for two of the three events
Event months: LTCM: August 1998; loss of $1.9 billion or 45% of
LTCM’s capital 2000-Burst: March 2000; largest decline in NDX,
dropping 438.62 points in 10 days 9/11: September 2001
Time period (cont.)
7-month period surrounding the event month
3 months prior to event 1 event month 3 months post-event
Literature Review
Behavioural finance literature- 12 propositions based on Hong and Stein
(1999)
Claims-based asset pricing literature- Estimation of discrete state price distributions- Based on Breeden and Litzenberger (1978)
and refinements in Ross (2000)
Data sets1. Daily option prices for 7 months for each of the 3
events• SPX calls• NDX calls• SPX puts • NDX puts
2. Daily underlying index values, April 1998 - December 2001
• SPX• NDX
3. Daily, 1-month T-bill rates, April 1998 – December 2001
Methodology Estimation and optimization procedure for state prices
based on the no-arbitrage equation (Breeden and Litzenberger (1978), Ross (2000))
Estimation state prices (q) and estimated objective probabilities (p) to calculate state price density, L= (Rosenberg and Engle (2002))
Disaggregating state price density into 3 portfolios: L, CL, and PL (Yang (2003))
p
q
Summary of impact measuresMeasure Indication of
event impacts
SPDsSkewness Higher Skewness
Volatility Higher volatility
L %L > 1 Higher %L>1
Excess returns of L, CL and PL
Volatility Higher volatility
Correlation between CL and PL
Negative correlation
First-order autocorrelation
Negative autocorrelation
Summary of Results
SPX VIX Close LTCM Bubble 9/11
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
Sep-97 Nov-97 Feb-98 May-98 J ul-98 Oct-98 Dec-98 Mar-99 J un-99 Aug-99 Nov-99 Feb-00 Apr-00 J ul-00 Oct-00 Dec-00 Mar-01 May-01 Aug-01 Nov-01 J an-02 Apr-02 J ul-02
Some interesting resultson LTCM
Largest impacts occurred prior to August event month
NDX reacts less and slower than SPXCalls have longer duration of reaction than
putsSkewness of SPDs and two sets of volatilities
show distinct patterns of reactions
Figure 2b. Cross-market comparisons of Volatilities during LTCM.
Volatilities on E(RPL)
0
200
400
600
800
1000
1200
-3 -2 -1 0 1 2 3
NDXp
SPXp
NDXc
SPXc
Some interesting resultson 2000-Burst
No significant information leakage for NDX calls, NDX puts, and SPX puts
Largest impacts in NDX callsLonger duration of impacts in NDX marketsReactions in calls larger and longer-lastingSPD skewness and volatilities on excess
returns on PL yield consistent conclusions
Figure 3a. Cross-market comparisons of volatilities during 2000- Burst.
Volatilities on E(RPL)
0
100
200
300
400
500
600
700
800
900
-3 -2 -1 0 1 2 3
NDXc NDXp SPXc SPXp
SPXc
NDXc
Some interesting resultson 9/11
No information leakage – good controlNo significant post-event impact in two
puts marketsLarger immediate and cumulative impacts in
NDX marketsCalls have larger immediate impactsMost sensitive measure: volatilities in excess
returns on PL
Volatilities on E(RPL) - NDXc and SPXc
0
10000
20000
30000
40000
50000
60000
70000
80000
-3 -2 -1 0 1 2 3
NDXc SPXc
Cross-market comparisons of volatilities during 9/11
Volatilities on E(RPL) - NDXp and SPXp
0
5
10
15
20
25
30
-3 -2 -1 0 1 2 3
NDXp SPXp
Cross-market comparisons of volatilities during 9/11
Some interesting resultsCross-event
Calls sustain larger and longer impacts from all three events
LTCM had largest effects on SPX markets
9/11 had largest effects on NDX markets
Conclusions
General Conclusions: Calls markets reacted more to the events than puts markets --
unexpected No information leakage during 9/11 – as expected No information leakage during 2000-Burst – not as expected Significant information leakage during LTCM – as expected Longest duration of impacts during 2000-Burst; shortest during 9/11 – as
expected Largest volatility changes in 9/11; smallest in LTCM – as expected LTCM more effects on SPX markets – as expected 2000-Burst more effects on NDX markets – as expected 9/11 more effects on NDX markets – not as expected Skewness and volatilities more reliable measures of impacts
Other conclusions
Contamination effects from pre-existing conditions and/or post-event actions
For the future: Hypotheses need to be tightened Statistical testing of monthly changes in impact
measures (t-tests and F-tests) More work to be done!