The Factor Structure in Equity Options

88 Pages Posted: 25 Feb 2013 Last revised: 14 Sep 2016

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Mathieu Fournier

HEC Montreal

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Date Written: September 13, 2016


Equity options display a strong factor structure. The first principal components of the equity volatility levels, skews, and term structures explain a substantial fraction of the cross-sectional variation. Furthermore, these principal components are highly correlated with the S&P500 index option volatility, skew, and term structure respectively. We develop an equity option valuation model that captures this factor structure. The model predicts that firms with higher market betas have higher implied volatilities, steeper moneyness slopes, and a term structure that co-varies more with the market. The model provides a good fit and the equity option data support the model’s cross-sectional implications.

Keywords: factor models, equity options, implied volatility, option-implied beta

JEL Classification: G10, G12, G13

Suggested Citation

Christoffersen, Peter and Fournier, Mathieu and Jacobs, Kris, The Factor Structure in Equity Options (September 13, 2016). Rotman School of Management Working Paper No. 2224270. Available at SSRN: or

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
416-946-5511 (Phone)


Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000

University of Aarhus - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C

Mathieu Fournier

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3 H3T 2A7

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

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