Volatility Smirk as an Externality of Agency Conict and Growing Debt

Marcin Jaskowski and Michael McAleer
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Marcin Jaskowski: Erasmus School of Economics, Erasmus University Rotterdam

No 2013-29, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

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.

Keywords: Volatility Smirk; Asymmetric Volatility Smile; Agency Conict; Debt Externality; Leverage. (search for similar items in EconPapers)
JEL-codes: D81 G12 G13 G32 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2013, Revised 2013-08
Note: Acknowledgments: The authors wish to thank Dick van Dijk, Eberhard Mayerhofer, Yuliy Sannikov and Wing Wah Tham for helpful comments and suggestions. yFor nancial support, the second author wishes to acknowledge the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science.
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Related works:
Journal Article: Volatility smirk as an externality of agency conflict and growing debt (2015)
Working Paper: Volatility Smirk as an Externality of Agency Conflict and Growing Debt (2013)
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