The 1987 crash traumatized U.S. derivatives markets in ways absent elsewhere.

Evidence

What was learned in October 1987, therefore, was more than that stock markets could suddenly fall by previously unthinkable amounts: it was also that the consequences of such a fall could threaten the very existence of derivatives markets. Nor were all the effects of the crash short-lived: it was 1995 before stock options trading on the CBOE recovered to precrash volumes (CBOE/OCC 1998a, p. 12). 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: connects to: The 1987 crash taught options markets that unhedged put sales posed systemic risk — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 931; The 1987 crash’s minimal economic impact hides how traumatic it was for market participants. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 155; Post-1987 option pricing may be rational given the crash’s trauma, not irrational. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 155 (+2 more)

Related

• The 1987 crash taught options markets that unhedged put sales posed systemic risk (similarity 0.89)
• Post-1987 option pricing may be rational given the crash’s trauma, not irrational. (similarity 0.89)
• The 1987 crash’s minimal economic impact hides how traumatic it was for market participants. (similarity 0.89)
• The post-1987 options skew was primarily an American rather than global phenomenon (similarity 0.87)
• The 1987 crash exposed how fragile the options clearing system was to extreme prices. (similarity 0.84)
• The 1987 crash permanently shifted the S&P options market’s implied distribution toward crash expectations. (similarity 0.84)
• Explaining post-1987 option prices requires crash frequencies roughly four times historical rates (similarity 0.83)
• The 1987 crash permanently broke Black-Scholes fit with market prices (similarity 0.83)
• Implied volatility spiked from 20 to 170 percent in the 1987 crash. (similarity 0.83)
• Options trading volumes took eight years to recover from the 1987 crash. (similarity 0.81)
• The 1987 crash ended the Barnesian performativity of classic option-pricing theory (similarity 0.80)
• The persistent option skew reflects rational trauma from 1987, not mispricing (similarity 0.80)
• Index options markets now function like catastrophe insurance markets with concentrated writers (similarity 0.80)
• Collective institutional trauma, not objective risk, sustains the volatility skew (similarity 0.80)
• The 1987 crash ended the Black-Scholes model’s empirical fit for good (similarity 0.79)

Broader Connections

• The 1987 crash’s minimal economic impact hides how traumatic it was for market participants. #corroborates (0.90) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 155
• The 1987 crash taught options markets that unhedged put sales posed systemic risk #exemplifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 931
• Post-1987 option pricing may be rational given the crash’s trauma, not irrational. #expands (0.82) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 155