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- Title
The Factor Structure in Equity Options.
- Authors
Christoffersen, Peter; Fournier, Mathieu; Jacobs, Kris
- Abstract
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.
- Subjects
OPTIONS (Finance); MATHEMATICAL models of option; VALUATION; MARKET volatility; EQUITY (Law); MATHEMATICAL models; ACCOUNTING
- Publication
Review of Financial Studies, 2018, Vol 31, Issue 2, p595
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhx089