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Volatility smirk as an externality of agency conflict and growing debt

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  • Marcin Jaskowski
  • Michael McAleer

Abstract

type="main" xml:lang="en"> Since the work of Black in the mid-1970s, the source of the stock market volatility smirk has remained controversial. The volatility smirk is a side effect of agency conflict, and occurs in the optimum, even after resolving the agency conflict. The slope of the smirk increases with the severity of the initial agency conflict between management and investors. It is predicted that the higher is the compensation of the manager, the steeper is the volatility smirk, for both time series and cross-sections of companies. These results help to disentangle the leverage effect from alternative explanations such as volatility feedback, time-varying risk premium, and down-market effects.

Suggested Citation

  • Marcin Jaskowski & Michael McAleer, 2015. "Volatility smirk as an externality of agency conflict and growing debt," International Journal of Economic Theory, The International Society for Economic Theory, vol. 11(4), pages 389-404, December.
    • Handle: RePEc:bla:ijethy:v:11:y:2015:i:4:p:389-404
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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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