The Behavior of the Implied Risk Neutral Density for the U.S. Stock Market on September 29, 2008

VIDEO (.AVI FILE, 4.85 MB)

The paper "Estimating the Implied Risk Neutral Density for the U.S. Market Portfolio" shows how the market's "Risk Neutral" probability distribution for the level of the S&P 500 stock index on a future date can be extracted from the prices of index options that mature on that date.

On September 29, 2008 the House of Representatives voted down the first emergency bailout bill.  In shock, the Dow fell 777 points, one of the largest 1-day declines in history.  This video shows how the Risk Neutral probability density behaved minute by minute during the course of that tumultuous day.  The density is for the expected level of the stock market on option expiration day, Dec. 19, 2008.

The graph title gives the minute. The vertical green line shows the current level of the S&P index in the market in that minute.

The center (black) portion of the curve comes directly from the options prices; the left (blue) and right (red) tails come from fitting tails from a Generalized Extreme Value distribution, as described in the paper. The legend gives technical details about the properties of the estimated density and the tails.

You can control the size and speed of the video using the player's controls. The slider lets you jump to a particular time easily. There is no audio.