The Relationship between Systematic Risk Proportion and the Slope of the Implied Volatility Curve by

In this empirical study, we examine one of the fundamental assumptions of the Black-Scholes Option Pricing Theory; that the proportion of systematic risk of total risk has no effect on intrinsic option prices. This hypothesis was first proposed by Jin-Chuan Duan and Jason Wei (2006) and we will use a similar methodology in testing the hypothesis that the slope of implied volatility curve is related to the proportion of systematic risk of the underlying asset. We will use daily option quotes on the components of the S&P100 index in order to explore the relationship between the systematic risk proportion and the slope of the implied volatility curve: specifically, we hope to establish that it has a direct impact in that the higher the systematic risk proportion, the steeper the slope of the implied volatility curve. The author would like to thank the Stern School of Business at New York University for its support of this research effort. In particular, I would like to thank M. Subrahmanyam, coordinator of the Honors Program, R. Engle, my thesis advisor, A. Mistry, W. Boudry and S. Joens of the Finance Department at the NYU Stern School of Business for their invaluable contributions. The authors email address is [email protected]. Any remaining errors are the sole responsibility of the author.