Since Black (1976), the source of the stock price volatility smirk has remained a controversy. The volatility smirk is a side effect of agency conflict. An important distinction is that the smirk occurs in the optimum, even after agency conflict has been resolved. The slope of the smirk is found to increase with the severity of the initial agency conflict 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 effect from other potential explanations like volatility feedback, the time-varying risk premium, and a down-market effect.

agency con ict, asymmetric volatility smile, debt externality, leverage, volatility smirk
Criteria for Decision-Making under Risk and Uncertainty (jel D81), Asset Pricing (jel G12), Contingent Pricing; Futures Pricing (jel G13), Financing Policy; Capital and Ownership Structure (jel G32)
Tinbergen Institute
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Erasmus School of Economics

Jaskowski, M, & McAleer, M.J. (2013). Volatility Smirk as an Externality of Agency Conflict and Growing Debt (No. TI 13-114/III). Discussion paper / Tinbergen Institute (pp. 1–22). Tinbergen Institute. Retrieved from