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Volatility Smirk as an Externality of Agency Conflict and Growing Debt

Author

Listed:
  • Marcin Jaskowski

    (Erasmus University Rotterdam)

  • Michael McAleer

    (Erasmus University Rotterdam, National Tsing Hua University, Taiwan; Complutense University of Madrid, Spain)

Abstract

This discussion paper led to a publication in the 'International Journal of Economic Theory' , 2015, 11(4), 389-404. Since Black (1976), the source of the stock price volatility smirk has remained a controversy. The volatility smirk is a side effect of agency conflict. An important distinction is that the smirk occurs in the optimum, even after agency conflict has been resolved. The slope of the smirk is found to increase with the severity of the initial agency conflict between management and investors. It is predicted that the higher is the compensation of the manager, the steeper will be the volatility smirk, both for time series and cross sections of companies. These results may help to disentangle the leverage effect from other potential explanations like volatility feedback, the time-varying risk premium, and a down-market effect.

Suggested Citation

  • Marcin Jaskowski & Michael McAleer, 2013. "Volatility Smirk as an Externality of Agency Conflict and Growing Debt," Tinbergen Institute Discussion Papers 13-114/III, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20130114
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    File URL: https://papers.tinbergen.nl/13114.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Volatility Smirk; Asymmetric Volatility Smile; Agency Conflict; Debt Externality; Leverage;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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