Structural Stochastic Volatility

52 Pages Posted: 19 Nov 2020 Last revised: 1 Sep 2021

See all articles by Federico M. Bandi

Federico M. Bandi

Johns Hopkins University

Nicola Fusari

Johns Hopkins University - Carey Business School

Roberto Renò

University of Verona - Department of Economics

Date Written: October 22, 2020

Abstract

A novel closed-form pricing formula for short-maturity options is employed to jointly identify
equity characteristics (spot volatility, spot leverage, and spot volatility of volatility) which have
been the focus of large, but separate, strands of the literature. Interpreting equity as a call option
on asset values, all equity characteristics should depend on structural sources of risk, such
as the variance of the firm’s assets and the extent of the firm’s financial leverage. We confirm
the implications of theory with data, thereby providing support for relations (like the link between
spot leverage and the firm’s financial leverage) broadly considered empirically ambiguous.

Keywords: short-maturity options, equity characteristics, Merton's model, nancial leverage, credit spreads.

JEL Classification: C51, C52, G12

Suggested Citation

Bandi, Federico M. and Fusari, Nicola and Renò, Roberto, Structural Stochastic Volatility (October 22, 2020). Available at SSRN: https://ssrn.com/abstract=3717015 or http://dx.doi.org/10.2139/ssrn.3717015

Federico M. Bandi

Johns Hopkins University ( email )

100 International Drive
Baltimore, MD 21202
United States

Nicola Fusari (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Roberto Renò

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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