Investors Expectations and Preferences during the Financial Crisis and the Bursting Internet Bubble: Evidence from the Options Markets

This paper examines how the investors’ expectations of the stock market evolve over the ten-year period between 1999 to 2008. In the past decade, the U.S. stock market experienced two major crises, with a relatively steady growth period in between. Using options implied risk neutral distributions to proxy for investors’ expectations, the time series of the implied risk neutral distributions of the sector returns (Nasdaq 100 and SPDR Financial ETFs), and the broad base index returns (S&P 500 index) are extracted and examined. It is found that in general, investors’ perception of the sector returns are more dispersed than the broad base index returns, this dispersion is even more pronounced during the crises. In addition, it also suggests that the impact of the 2007 financial crisis is more severe than the crisis following the Dot.com mania in the year 2000.