Volatility Risks and Growth Options

56 Pages Posted: 1 Nov 2013

See all articles by Hengjie Ai

Hengjie Ai

University of Minnesota - Carlson School of Management; University of Minnesota - Twin Cities - Carlson School of Management

Dana Kiku

University of Illinois at Urbana-Champaign

Date Written: October 8, 2013

Abstract

We propose to measure growth opportunities by firms' exposure to idiosyncratic volatility news. Theoretically, we show that the value of a growth option increases in idiosyncratic volatility but its response to volatility of aggregate shocks can be either positive or negative depending on option moneyness. Empirically, we show that price sensitivity to variation in idiosyncratic volatility carries significant information about firms' future investment and growth even after controlling for conventional proxies of growth options such as book-to-market and other relevant firm characteristics. Consistent with our theoretical arguments, we also find that firm' exposure to aggregate volatility, while priced, does not help predict their future growth. Option-intensive firms identified using our idiosyncratic volatility-based measure earn a lower premium than do firms that rely more heavily on assets in place.

JEL Classification: G00, G10, G12

Suggested Citation

Ai, Hengjie and Ai, Hengjie and Kiku, Dana, Volatility Risks and Growth Options (October 8, 2013). Finance Down Under 2014 Building on the Best from the Cellars of Finance, Available at SSRN: https://ssrn.com/abstract=2347846 or http://dx.doi.org/10.2139/ssrn.2347846

Hengjie Ai

University of Minnesota - Carlson School of Management ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Dana Kiku (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
28
Abstract Views
599
PlumX Metrics