Accounting Transparency and the Implied Volatility Skew

60 Pages Posted: 28 Sep 2022

See all articles by Hitesh Doshi

Hitesh Doshi

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

Jan Ericsson

McGill University; Swedish Institute for Financial Research (SIFR)

Stephen Szaura

BI Norwegian School of Business

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: June 24, 2022

Abstract

Stock price jump risk is known to be important for explaining the option-implied volatility skew generated by the Black-Scholes model. Financial leverage (distress) has an important impact on the shape of the implied volatility skew, however, we find that the impact of leverage on the implied volatility skew depends on the quality of the firm’s accounting transparency. In this paper, we propose a model where incomplete accounting information and the risk of financial distress together act as important drivers of jump rates and sizes for individual stocks. Consistent with our model, empirical tests using individual stock option data indicate that the impact of leverage on the skew is weaker for firms with lower accounting transparency and stronger for firms with higher accounting transparency.

Keywords: Implied Volatility Skew, Accounting Transparency, Credit Risk

JEL Classification: G12, G13

Suggested Citation

Doshi, Hitesh and Ericsson, Jan and Szaura, Stephen and Yu, Fan, Accounting Transparency and the Implied Volatility Skew (June 24, 2022). Available at SSRN: https://ssrn.com/abstract=4225996 or http://dx.doi.org/10.2139/ssrn.4225996

Hitesh Doshi

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

Houston, TX 77204-6021
United States

Jan Ericsson

McGill University ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
(514) 398-3186 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://people.mcgill.ca/jan.ericsson/

Swedish Institute for Financial Research (SIFR)

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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