The Factor Structure in Equity Options

Peter Christoffersen, Mathieu Fournier, Kris Jacobs

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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 crosssectional variation. Furthermore, these principal components are highly correlated with the S&P 500 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 covaries more with the market. The model provides a good fit, and the equity option data support the model's cross-sectional implications.
TidsskriftReview of Financial Studies
Udgave nummer2
Sider (fra-til)595-637
Antal sider43
StatusUdgivet - feb. 2018


  • Asset pricing
  • Trading volume
  • Bond interest rates
  • Contingent pricing
  • Futures pricing