An empirical analysis of the effects of the September 11 terrorist attacks upon the US options market : a research report in partial fulfillment of the requirements for the degree of Master of Business Studies at Massey University

Abstract

This research examines the effects that the September 11 terrorist attacks had upon the United States options markets, namely the OEX and SPX contracts. The effects on trading volume is analysed and it is found that overall volume of options did not increase in the post September 11 period when compared to the pre September 11 period. However, there was a significant increase in volume of options traded that were closest-to-the-money. This effect is not due to a day of the week trading effect, as daily effects were found not to be affected by the September 11 terrorist attacks. Investors were also found to become more risk adverse in the post September 11 period.

Implied volatility index measures were used as a proxy measure for implied volatility. It was found that a significant increase in implied volatility in the post September 11 period took place. Results show that the use of implied volatility index measures provided a more robust estimate of future realised volatility than implied volatility of a single option close-to-the-money. The use of implied volatility indexes as an ex-ante forecast for future realised volatility was not affected by the September 11 attacks. In addition, a comparison is made between two methodologies of forming an implied volatility index, VXO and VIX and it is investigated which one provides the best ex-ante forecast for future realised volatility. It was found that neither the VXO nor the VIX methodologies provided more superior results as an ex-ante forecaster of future realised volatility.