The Impact of Systematic Risk on the Price Structure of Individual Equity Options in Korea Market
Yuen Jung Park
This paper investigates the impact of systematic risk on the price structure of individual equity options in Korea market. The price structures is represented by the level and slope of implied volatility curves, and the systematic risk is measured by the systematic risk proportion, defined as the ratio of the systematic variance over the total variance. Using daily out-of-the money(OTM) and at-the-money(ATM) option quotes for 12 firms from Oct. 2008 to April 2011, we first demonstrate that across most maturity and moneyness groups, the systematic risk proportion of the underlying asset explains the cross-sectional differences in the level of implied volatilities. Specially, the level effect is robust for the short-term ATM options as analyzed through Fama- Macbeth(1973) 2 pass-regression and panel regression. Second, we find that unlikely to U.S. options market, the slope of implied volatility is not strongly related to the systematic risk proportion of the underlying asset. Fama-Macbeth(1973) analysis shows the slope effect only for ATM options but panel regression result does not show any significant slope effect across all groups. Finally, the panel analysis controlling for firm-specific variables shows a unique result that leverage and firm size play better role than the systematic risk in explaining the long-term or OTM call option prices.
Individual equity options,Systematic risk proportion,Level of implied volatility,Slope of implied volatility,Fama-MacBeth(1973) 2-pass regression
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