Is Systematic Risk Priced in Options?
41 Pages Posted: 16 May 2006
Date Written: May 14, 2006
In this empirical study, we demonstrate the importance of systematic risk in option prices. We do so by examining two testable hypotheses relating both the level and slope of implied volatility curves to the systematic risk of the underlying asset. Using daily option quotes on the S&P 100 index and its 30 largest component stocks, we show that after controlling for the underlying asset's total risk, a higher amount of systematic risk leads to a higher level of implied volatility and a steeper slope of the implied volatility curve. The findings are robust to various alternative specifications and estimations.
Keywords: systematic risk, option prices, implied volatility, skewness
JEL Classification: G10, G13
Suggested Citation: Suggested Citation