Stock Price Dynamics of Listed Growth Companies - Evidence from the Options Market

Abstract

This paper empirically investigates the stock price dynamics implied by the valuation model proposed by Schwartz and Moon (2001) for growth companies. We test the hypothesis that the inherent stochastic process for the firm equity value better describes the actual dynamics than standard geometric Brownian motion. Because the form of the stochastic process decisively influences the values of options written on a firm's stock, we rely on price information from the options market to test the hypothesis. Contrary to our expectations, we find no evidence that the Schwartz-Moon model is superior in explaining the options market for growth companies.

Keywords: growth companies, implied volatility, option pricing, Schwartz-Moon model, stock price dynamics

JEL Classification: G13