Journal article
Anchoring-Adjusted Option Pricing Models
Journal of Behavioral Finance, Vol.20(2), pp.139-153
2019
Abstract
Relying on a useful starting point and attempting to adjust it appropriately is a robust human decision-making heuristic. Evidence suggests that underlying stock volatility is such a starting point, which is scaled up to estimate call option volatility. The author adjusts the Black-Scholes, Heston, and Bates models for reliance on this starting point. The adjustment mechanism captures several option-return puzzles. The adjusted Black-Scholes generates implied-volatility skew. The adjusted Heston stochastic-volatility model matches the same data better, does so at more plausible parameter values, and generates a steep short-term skew. Furthermore, 2 novel predictions are empirically tested and strongly supported in the data.
Details
- Title
- Anchoring-Adjusted Option Pricing Models
- Authors
- Hammad Siddiqi (Author) - University of the Sunshine Coast - Faculty of Arts, Business and Law
- Publication details
- Journal of Behavioral Finance, Vol.20(2), pp.139-153
- Publisher
- Routledge
- Date published
- 2019
- DOI
- 10.1080/15427560.2018.1492922
- ISSN
- 1542-7560
- Organisation Unit
- School of Business and Creative Industries; University of the Sunshine Coast, Queensland; USC Business School - Legacy
- Language
- English
- Record Identifier
- 99450621202621
- Output Type
- Journal article
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