Systematic risk and volatility skew

Shyh-Weir Tzang, Chou-Wen Wang, Min-Teh Yu

Research output: Contribution to journalArticle

12 Scopus citations

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. (C) 2015 Elsevier Inc. All rights reserved.
Original languageEnglish
Pages (from-to)72-87
Number of pages16
JournalInternational Review of Economics and Finance
Volume43
DOIs
StatePublished - May 2016

Keywords

  • Beta smile; CAPM; GARCH; Systematic risk proportion; Volatility skew

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