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Volatility Smirk as an Externality of Agency Conict and Growing Debt

Author

Listed:
  • Marcin Jaskowski

    (Erasmus School of Economics, Erasmus University Rotterdam)

  • Michael McAleer

    (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.)

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.

Suggested Citation

  • Marcin Jaskowski & Michael McAleer, 2013. "Volatility Smirk as an Externality of Agency Conict and Growing Debt," Documentos de Trabajo del ICAE 2013-29, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Aug 2013.
    • Handle: RePEc:ucm:doicae:1329
    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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    References listed on IDEAS

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    More about this item

    Keywords

    Volatility Smirk; Asymmetric Volatility Smile; Agency Conict; Debt Externality; Leverage.;
    All these keywords.

    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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