Endogenous Option Pricing

35 Pages Posted:

See all articles by Alessio Saretto

Alessio Saretto

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Andrea Gamba

University of Warwick - Finance Group

Date Written: December 14, 2020

Abstract

We show that a dynamic model of investment and capital structure choices, where the firm faces real and financial frictions, can generate option prices and implied volatilities that are in line with those of the average optionable stock. As the balance between the fundamental economic forces that are responsible for the way options are priced is state-dependent, the model is also able to generate a wide cross-sectional dispersion in implied volatility surfaces that matches what we observe in the data.

Keywords: option pricing, leverage, growth options

JEL Classification: G00, G13, G30

Suggested Citation

Saretto, Alessio and Gamba, Andrea, Endogenous Option Pricing (December 14, 2020). Available at SSRN: https://ssrn.com/abstract=

Alessio Saretto (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

800 Campbell Road
SM 31
Richardson, TX 75080
United States
972-883-5907 (Phone)

HOME PAGE: http://www.utdallas.edu/~axs125732

Andrea Gamba

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

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

Paper statistics

Downloads
0
Abstract Views
13
PlumX Metrics