Collective institutional trauma, not objective risk, sustains the volatility skew

Evidence

It is this collective trauma, we conjecture, that sustains the skew. It is, for example, noteworthy that it has largely been an American phenomenon. The British options market did not respond to 1987 by developing a similar skew (Gemmill 1996). Although stock markets in the United Kingdom and around the world also crashed, the effects on the then-tiny British derivatives markets were nothing like as devastating. When a consistent skew did emerge in Britain in the first half of the 1990s, and also in Japan, it was only a third as intense as in the United States (Gemmill and Kamiyama 2001). — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 165

Categorization

• XREF: This is the crux of the performativity/social-construction argument: cross-national variation isolates the mechanism. Echoes Halbwachs on collective memory as a socially framed force. — connects to: The persistent option skew reflects rational trauma from 1987, not mispricing — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 915; The skew’s persistence after 1987 undermines the discovery narrative of option pricing — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1163; Unmanageable information flows produce a pathological collective panic
• DEFINE: Sharpens the ‘trauma sustains pricing’ hypothesis by using the British/Japanese contrast as a natural experiment.

Related

• The post-1987 options skew was primarily an American rather than global phenomenon (similarity 0.85)
• Options trading volumes took eight years to recover from the 1987 crash. (similarity 0.83)
• The persistent option skew reflects rational trauma from 1987, not mispricing (similarity 0.80)
• The 1987 crash traumatized U.S. derivatives markets in ways absent elsewhere. (similarity 0.80)
• The post-1987 volatility skew became a permanent feature of index options (similarity 0.80)
• Post-1987 option pricing may be rational given the crash’s trauma, not irrational. (similarity 0.79)

Broader Connections

• The persistent option skew reflects rational trauma from 1987, not mispricing #corroborates (0.95) — Donald MacKenzie, An Engine, Not a Camera, 915
• The skew’s persistence after 1987 undermines the discovery narrative of option pricing #corroborates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1163