We investigate whether firm fundamentals can explain the shape of option implied volatility (IV)curve. Extending Geske's (1977) compound option model, we link firm fundamentals to the IV curvetheoretically. Using options on all available US-listed companies, we find empirically that...

We document empirically that firm fundamentals have explanatory power on the shape of the option implied volatility (IV) curve that is both economically and statistically significant. We find further that, after accounting for fundamentals, the associated IV process can generate overreaction in...