Capital structure effects on the prices of equity call options
| Autor: | Avanidhar Subrahmanyam, Yi Zhou, Robert Geske |
|---|---|
| Rok vydání: | 2016 |
| Předmět: |
Economics and Econometrics
050208 finance Capital structure Financial economics Strategy and Management 05 social sciences Equity (finance) Black–Scholes model Implied volatility Compound option Corporate finance Accounting 0502 economics and business Econometrics Economics Volatility smile 050207 economics Volatility (finance) Finance |
| Zdroj: | Journal of Financial Economics. 121:231-253 |
| ISSN: | 0304-405X |
| DOI: | 10.1016/j.jfineco.2016.03.009 |
| Popis: | We examine whether values of equity options traded on individual firms are sensitive to the firm’s capital structure. We estimate the compound option (CO) model, which views equity as an option on the firm. Compared with the Black-Scholes model, the CO model with a term structure of volatility (TSV) reduces pricing errors by 20% on average. The compound option effect is particularly strong for highly levered firms and long-term options, in which the pricing improvement is up to 70% of the Black-Scholes error. Without a TSV, the CO model reduces pricing errors of in-the-money options by 12.74% on average and for out-of-the-money by 9.22%. We show that the CO model implies a market value of firm leverage and allows imputation of the firm’s implied volatility, both of which have potential applications in corporate finance. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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