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Endogenous Option Pricing

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Abstract

We show that a structural model of firm decisions can produce very flexible implied volatility surfaces: upward and downward sloping, u-shaped. A calibrated version of the model is able to match many unconditional financial characteristics of the average option-able stock, and can help explain how, contrary to simple economic intuition, more valuable growth and contraction options are associated with a more negatively sloped implied volatility curve (i.e., a more negatively skewed implied distribution).

Suggested Citation

  • Andrea Gamba & Alessio Saretto, 2022. "Endogenous Option Pricing," Working Papers 2202, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:93888
    DOI: 10.24149/wp2202
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    More about this item

    Keywords

    option pricing; risk-neutral skewness; growth options; leverage; investments;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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