Are we using the wrong letters? An analysis of executive stock option Greeks

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• 作者：Susana álvarez-Díez (1)
  J. Samuel Baixauli-Soler (2)
  María Belda-Ruiz (2)
  
• 关键词：Executive stock options ; Delta ; Vega ; Risk ; taking ; Stock return volatility
• 刊名：Central European Journal of Operations Research
• 出版年：2014
• 出版时间：June 2014
• 年：2014
• 卷：22
• 期：2
• 页码：237-262
• 全文大小：
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• 作者单位：Susana álvarez-Díez (1)
  J. Samuel Baixauli-Soler (2)
  María Belda-Ruiz (2)
  
  1. Departamento de Métodos Cuantitativos para la Economía, Facultad de Economía y Empresa, Universidad de Murcia, 30100, Murcia, Spain
  2. Departamento de Organización de Empresas y Finanzas, Facultad de Economía y Empresa, Universidad de Murcia, 30100, Murcia, Spain
  
• ISSN：1613-9178

文摘

Greek letters, in particular delta and vega based on the Black–Scholes model (BS), have been widely used to estimate the sensitivity of CEO wealth to changes in stock price (delta) and stock return volatility (vega) and to evaluate the executive stock options (ESOs) granted on the basis of performance and risk. However, the BS model does not take into account the main features of ESOs and therefore the delta and vega values it produces are not valid. The Cvitanic–Wiener–Zapatero model (CWZ) is an alternative model to Black–Scholes for valuing ESOs. It has a closed formula and considers the main features of ESOs. We carry out a sensitivity analysis to show that research on option-based compensation and its risk-taking effects is not robust in ESO pricing models. The sensitivity analysis consists of comparing the impact of the common parameters of the BS and CWZ models, as well as the effect of the specific parameters of the CWZ model, on the sensitivity of CEO wealth to stock price and stock volatility. Additionally, using panel data methodology, we develop an empirical analysis to illustrate the influence of stock return volatility and different corporate policies on both CEO wealth sensitivities.