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Volatility Smirk as an Externality of Agency Conict and Growing Debt

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Jaskowski, Marcin and McAleer, Michael (2013) Volatility Smirk as an Externality of Agency Conict and Growing Debt. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 29, 2013, ] (Unpublished)

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Official URL: http://eprints.ucm.es/22630/


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Abstract

Since Black (1976), the source of the stock price volatility smirk has remained a controversy. The volatility smirk is a side eect of agency conict. An important distinction is that the smirk occurs in the optimum, even after agency conict has been resolved. The slope of the smirk is found to increase with the severity of the initial agency conict between management and investors. It is predicted that the higher is the compensation of the manager, the steeper will be the volatility smirk, both for time series and cross sections of companies. These results may help to disentangle the leverage eect from other potential explanations like volatility feedback, the time-varying risk premium, and a down-market effect.


Item Type:Working Paper or Technical Report
Additional Information:

Acknowledgments: The authors wish to thank Dick van Dijk, Eberhard Mayerhofer, Yuliy Sannikov and
Wing Wah Tham for helpful comments and suggestions.
yFor financial support, the second author wishes to acknowledge the Australian Research Council, National
Science Council, Taiwan, and the Japan Society for the Promotion of Science.
JEL: D81, G12, G13, G32.

Uncontrolled Keywords:Volatility Smirk, Asymmetric Volatility Smile, Agency Conict, Debt Externality, Leverage.
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2013
Number:29
ID Code:22630
Deposited On:04 Sep 2013 10:44
Last Modified:16 Feb 2016 10:00

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