Rev Quant Finan Acc (2006) 27:365–382
The Enron Bankruptcy: When did the options market
in Enron lose it’s smirk?
Springer Science+ Business Media, LLC 2006
Abstract The Enron Corporation went from a $65 billion dollar market capitalization
to bankruptcy in just 16 months. Using statistical techniques for extracting the implied
probability distributions built into option prices, I examine the market’s expectation
of Enron’s risk of collapse. I ﬁnd that the options market remained far too optimistic
about the stock until just weeks before their bankruptcy ﬁling.
Keywords Volatility smile
JEL Classiﬁcation G13
The Enron Corporation was widely praised by Wall Street analysts even after the bear
market began in early 2000. In August of 2000, its’ share price peaked at $90. With a
market capitalization of $65 billion, it was the seventh largest publicly traded company
in the U.S. By August 2001 though, a series of questions about the company’s ﬁnancial
statements emerged following the resignation of their CEO. Four months later, the
company was in bankruptcy.
Enron’s collapse was due to excessive debt, disguised from the public through off
balance sheet entities. Wall Street buy side analysts were either deceived or dishonest.
Many maintained strong buy ratings until Enron was delisted.
Credit market analysts use balance sheet variables to predict bankruptcy. This clas-
sic approach dates back to Altman (1968). A dynamic hazard function approach is
considered in Shumway (2001). The three major credit rating agencies, however,
not warn investors until mid-October 2001. Enron’s bonds maintained an investment
B. Mizrach (
Department of Economics, Rutgers University, 75 Hamilton Street, New Brunswick, NJ 08901.
I thank Oded Palmon and an anonymous referee for helpful comments.
Fitch, Moody’s and Standard and Poor’s.