Systematic Risk and the Price Structure of Individual Equity Options

38 Pages Posted: 21 May 2007

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

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Abstract

This study demonstrates the impact of systematic risk on the prices of individual equity options. The option prices are characterized by the level and slope of implied volatility curves, and the systematic risk is measured as the proportion of systematic variance in the total variance. 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. Thus, systematic risk proportion can help differentiate the price structure across individual equity options.

Keywords: systematic risk, implied volatility, option price structure,equity options

JEL Classification: G10, G13

Suggested Citation

Duan, Jin-Chuan and Wei, Jason Zhanshun, Systematic Risk and the Price Structure of Individual Equity Options. Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=987646

Jin-Chuan Duan

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

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Singapore, 117592
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Jason Zhanshun Wei (Contact Author)

University of Toronto - Rotman School of Management ( email )

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