Stock Price Dynamics of Listed Growth Companies: Evidence from the Options Market

This paper empirically investigates the stock price dynamics implied by the valuation model proposed by Schwartz and Moon (2001) for growth companies. We test the hypothesis that the inherent stochastic process for the firm equity value better describes the actual dynamics than standard geometric Brownian motion. Because the form of the stochastic process decisively influences the values of options written on a firm’s stock, we rely on price information from the options market to test the hypothesis. Therefore, we propose an adapted version of the Least-Squares Monte Carlo algorithm to price options on the stock of a growth company whose value is determined by the Schwartz-Moon model. Calibrating the model to real-world stock and option data, we analyze the stock price dynamics implied by the Schwartz-Moon model empirically by comparing them to a standard geometric Brownian motion model. The study is conducted for three high-growth Internet companies: Amazon.com, eBay and Google. Contrary to our expectations, we find no evidence that the Schwartz-Moon model is superior in explaining the options market for growth companies. The reason is due to the Schwartz-Moon model’s restriction on specifying the volatility of revenues, which allows only for exponentially decreasing functions.