Capital structure effects on the prices of equity call options

• 成果类型: Article
• 署名作者: Geske, Robert; Subrahmanyam, Avanidhar; Zhou, Yi
• 署名单位: University of California System; University of California Los Angeles; California State University System; San Francisco State University
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2016.03.009
• 发表日期: 2016
• 页码: 231-253
• 关键词: derivatives; options; leverage; stochastic volatility

摘要

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. (C) 2016 Elsevier B.V. All rights reserved.