The Factor Structure in Equity Options

Peter Christoffersen, Mathieu Fournier, Kris Jacobs

Publikation: Working paperForskning

Abstrakt

Equity options display a strong factor structure. The first principal components of the equity volatility levels, skews, and term structures explain a substantial fraction of the cross-sectional variation. Furthermore, these principal components are highly correlated with the S&P500 index option volatility, skew, and term structure respectively. We develop an equity option valuation model that captures this factor structure. The model predicts that firms with higher market betas have higher implied volatilities, steeper moneyness slopes, and a term structure that co-varies more with the market. The model provides a good fit and the equity option data support the model’s cross-sectional implications.
OriginalsprogEngelsk
Udgivelses stedToronto
UdgiverRotman School of Management, University of Toronto
Antal sider88
DOI
StatusUdgivet - 2016
NavnRotman School of Management Working Paper
Nummer2224270

Emneord

  • Factor models
  • Equity options
  • Implied volatility
  • Option-implied beta

Citationsformater

Christoffersen, P., Fournier, M., & Jacobs, K. (2016). The Factor Structure in Equity Options. Rotman School of Management, University of Toronto. Rotman School of Management Working Paper, Nr. 2224270 https://doi.org/10.2139/ssrn.2224270