Calibration of a stock's beta using options prices

Sofiene El Aoud (1, 2) , Frédéric Abergel (1, 2)

1 FiQuant - Chaire de finance quantitative
2 MAS - Mathématiques Appliquées aux Systèmes - EA 4037

We present in our work a continuous time Capital Asset Pricing Model where the volatilities of the market index and the stock are both stochastic. Using a singular perturbation technique, we provide approximations for the prices of european options on both the stock and the index. These approximations are functions of the model parameters. We show then that existing estimators of the parameter beta, proposed in the recent literature, are biased in our setting because they are all based on the assumption that the idiosyncratic volatility of the stock is constant. We provide then an unbiased estimator of the parameter beta using only implied volatility data. This estimator is a forward measure of the parameter beta in the sense that it represents the information contained in derivatives prices concerning the forward realization of this parameter, we test then its capacity of prediction of forward beta and we draw a conclusion concerning its predictive power.

Domaines: Finance quantitative [q-fin.CP]; Gestion de portefeuilles [q-fin.PM]

Sofiene El Aoud, Frédéric Abergel. Calibration of a stock's beta using options prices. Econophysics Kolkata conference, Mar 2014, Kolkata, India. ⟨hal-01006405⟩