An Expanded Top-down Linear Option Pricing Model

Yaofei Xu; Zhendong Zhang

An Expanded Top-down Linear Option Pricing Model

Yaofei Xu
, Zhendong Zhang^*

^*Corresponding author for this work

Research output: Chapter in Book or Report/Conference proceeding › Conference Proceeding › peer-review

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Abstract

This study expands the top-down linear option pricing model (Wu and Zhang, 2025) and explores how the differential pricing on systematic and idiosyncratic risks affects the option pricing and returns. We decompose each greek risk into its systematic and idiosyncratic components. It is found that both components are priced, and the market prices of the risks can significantly predict the corresponding risk-targeting option portfolios’ future returns. Our investment analyses show that cross-sectional variations in market prices generate investment opportunities with high information ratios.

Original language	English
Title of host publication	14th International Conference on Futures and Other Derivatives, ICFOD
Publication status	Accepted/In press - Nov 2025

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title = "An Expanded Top-down Linear Option Pricing Model",

abstract = "This study expands the top-down linear option pricing model (Wu and Zhang, 2025) and explores how the differential pricing on systematic and idiosyncratic risks affects the option pricing and returns. We decompose each greek risk into its systematic and idiosyncratic components. It is found that both components are priced, and the market prices of the risks can significantly predict the corresponding risk-targeting option portfolios{\textquoteright} future returns. Our investment analyses show that cross-sectional variations in market prices generate investment opportunities with high information ratios.",

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AB - This study expands the top-down linear option pricing model (Wu and Zhang, 2025) and explores how the differential pricing on systematic and idiosyncratic risks affects the option pricing and returns. We decompose each greek risk into its systematic and idiosyncratic components. It is found that both components are priced, and the market prices of the risks can significantly predict the corresponding risk-targeting option portfolios’ future returns. Our investment analyses show that cross-sectional variations in market prices generate investment opportunities with high information ratios.

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BT - 14th International Conference on Futures and Other Derivatives, ICFOD

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An Expanded Top-down Linear Option Pricing Model

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