Keywords

CAPM, option pricing, systematic risk, option beta, planning horizon, market incompleteness.

Abstract

This paper investigates how the classical equilibrium asset-pricing framework embodied in the Capital Asset Pricing Model (CAPM) can be extended to the valuation of derivative securities, specifically European‐style options. While traditional option pricing models (e.g., Black Scholes model) rely on no‐arbitrage and risk-neutral valuation, they do not explicitly incorporate systematic risk (beta) or investor planning horizon. We develop a unified theoretical model that embeds the option payoff’s covariance with the market portfolio and allows for differences between investor horizon and option maturity. We then describe an empirical strategy to test whether options on higher‐beta underlying’s command higher required returns and whether pricing deviations from standard models are systematically related to underlying beta, time to maturity, and moneyness. Our findings provide preliminary support for the CAPM-based option pricing logic: underlying systematic risk matters for option valuation, and the investor horizon effect is non-negligible in less idealized markets.

Cite this Article

Chinton Emmanuel, 2025. "Empirical Derivation of Capital Asset Pricing Method (CAPM) Approach in Option Pricing", International Journal of Economics, Business, Management Research Intelligence (IJEBMRI) 1(2): 14-21.