The Option Pricing Model and the Risk Factor of Stock
29 Pages Posted: 6 Oct 2009
Date Written: January/March 1976
In this paper a joint capital asset pricing model and option pricing model is considered and applied to the derivation of an equity's value and its systematic risk. We first analyze the propreties of the two models and present some newly found properties of the option pricing model. We then investigate the effects of these properties on firm securityholders with less than perfect "me first" rules. We show how unanticipated changes in firm capital and asset structures can differentially affect a firm's debt and equity. In the final section we consider a number of theoretical and empirical implications of the joint model. These include investment policy as well as the causes and effects of non-stationarity in the systematic risk of levered equity and risky debt.
Keywords: Option pricing, wealth expropriation, nonstationary risk, leverage, investment decisions, financing decisions, conglomerate mergers, mergers, risky debt, levered equity
JEL Classification: G13, G12, G31, G32, G34, G33
Suggested Citation: Suggested Citation