Working Paper
Endogenous Option Pricing
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).
Keywords: option pricing; risk-neutral skewness; growth options; leverage; investments;
https://doi.org/10.24149/wp2202
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Provider: Federal Reserve Bank of Dallas
Part of Series: Working Papers
Publication Date: 2022-03-24
Number: 2202