The Option Pricing Model and the Risk Factor of Stock

29 Pages Posted: 6 Oct 2009

See all articles by Dan Galai

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Ronald W. Masulis

University of New South Wales - Australian School of Business; 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

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

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 5883235 (Phone)
972 2 5881341 (Fax)

Ronald W. Masulis (Contact Author)

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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