The Option Pricing Model and the Risk Factor of Stock

Galai, Dan; Masulis, Ronald W.

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The Option Pricing Model and the Risk Factor of Stock

Journal of Financial Economics (JFE), Vol. 3, No. 1/2, 1976

29 Pages Posted: 6 Oct 2009

See all articles by Dan Galai

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Date Written: January/March 1976

Abstract

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

Galai, Dan and Masulis, Ronald W., The Option Pricing Model and the Risk Factor of Stock (January/March 1976). Journal of Financial Economics (JFE), Vol. 3, No. 1/2, 1976, Available at SSRN: https://ssrn.com/abstract=1483287