Equity Option Prices and Firm Characteristics

46 Pages Posted: 31 Jan 2023 Last revised: 21 Mar 2024

See all articles by Gustavo Freire

Gustavo Freire

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Onno Kleen

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute

Date Written: January 30, 2023

Abstract

We investigate the information content of firm characteristics for the cross-section of equity option prices. We first show that 42 out of 86 characteristics significantly explain differences in the implied volatility surface (IVS) across stocks. Then, we exploit this relation to price equity options. We estimate the IVS of a given stock by using machine learning to optimally pool option information from stocks with similar characteristics, which overcomes the illiquidity of the equity option market. Our method improves upon stock-specific benchmarks in pricing options out-of-sample and allows us to uncover the nonlinear interactions between characteristics and option prices.

Keywords: Equity options, firm characteristics, implied volatility, random forest, machine learning

JEL Classification: C58, G12, G13

Suggested Citation

Freire, Gustavo and Kleen, Onno, Equity Option Prices and Firm Characteristics (January 30, 2023). Available at SSRN: https://ssrn.com/abstract=4342597 or http://dx.doi.org/10.2139/ssrn.4342597

Gustavo Freire

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://https://www.eur.nl/people/gustavo-freire

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://https://tinbergen.nl/person/2029/gustavo-freire

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

HOME PAGE: http://https://www.erim.eur.nl/people/gustavo-freire/

Onno Kleen (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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