Is Systematic Risk Priced in Options?

41 Pages Posted: 16 May 2006

See all articles by Jin-Chuan Duan

Jin-Chuan Duan

National University of Singapore (NUS) - Business School and Risk Management Institute

Jason Zhanshun Wei

University of Toronto - Rotman School of Management

Date Written: May 14, 2006

Abstract

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

Duan, Jin-Chuan and Wei, Jason Zhanshun, Is Systematic Risk Priced in Options? (May 14, 2006). Rotman School of Management Working Paper No. 06-05, Available at SSRN: https://ssrn.com/abstract=902122 or http://dx.doi.org/10.2139/ssrn.902122

Jin-Chuan Duan

National University of Singapore (NUS) - Business School and Risk Management Institute ( email )

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Jason Zhanshun Wei (Contact Author)

University of Toronto - Rotman School of Management ( email )

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