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;

JEL Classification: G12; G32;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2022-03-24

Number: 2202