Systematic risk and volatility skew

Shyh-Weir Tzang (), Chou-Wen Wang and Min-Teh Yu ()

International Review of Economics & Finance, 2016, vol. 43, issue C, 72-87

Abstract: The impact of systematic risk on volatility skew is assessed in a CAPM–GARCH framework under which the relationship between asset price and market index adheres to the CAPM with each residual following an asymmetric GARCH process. From numerical analysis, we demonstrate that (1) the relation between beta and implied volatilities presents a beta smile; (2) beta can determine the shape of implied volatility curve, but systematic risk proportion (SRP) cannot; and (3) the degree of negative skewness and positive kurtosis is proportional to the SRP; however, a higher SRP does not always lead to a higher level of implied volatility.

Keywords: Beta smile; CAPM; GARCH; Systematic risk proportion; Volatility skew (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:43:y:2016:i:c:p:72-87

DOI: 10.1016/j.iref.2015.10.032

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