Conference paper
Anchoring Heuristic in Option Pricing
Proceedings, pp.1-43
Australian Conference of Economists, 44th (Brisbane, Australia, 07-Jul-2015 - 10-Jul-2015)
Economic Society of Australia QLD Inc
2015
Abstract
An anchoring-adjusted option pricing model is developed with transaction costs in which the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. Anchoring bias implies that such adjustments are insufficient. Without anchoring and transaction costs, the Black-Scholes formula is obtained. The new model provides a unified explanation for a number of phenomena including the implied volatility skew, and the puzzling performance of covered-call-writing and zero-beta straddles. The model is also consistent with recent empirical findings regarding leverage adjusted option returns, and extends easily to jump-diffusion and stochastic-volatility approaches.
Details
- Title
- Anchoring Heuristic in Option Pricing
- Authors
- Hammad Siddiqi (Author) - University of Queensland
- Publication details
- Proceedings, pp.1-43
- Conference details
- Australian Conference of Economists, 44th (Brisbane, Australia, 07-Jul-2015 - 10-Jul-2015)
- Publisher
- Economic Society of Australia QLD Inc
- Organisation Unit
- School of Business and Creative Industries; University of the Sunshine Coast, Queensland; USC Business School - Legacy
- Language
- English
- Record Identifier
- 99508407502621
- Output Type
- Conference paper
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