In incomplete markets, risk judgments regarding options are necessary as options cannot be replicated by using the underlying stock and the risk-free asset. How are such risk judgments formed? Underlying stock risk is a natural starting point for call option risk as the two assets pay off in the...

In incomplete markets, risk judgments regarding options are necessary as options cannot be replicated by using the underlying stock and the risk-free asset. How are such risk judgments formed? Underlying stock risk is a natural starting point for call option risk as the two assets pay off in the...

In incomplete markets, risk judgments regarding options are necessary as options cannot be replicated by using the underlying stock and the risk-free asset. How are such risk judgments formed? Underlying stock risk is a natural starting point for call option risk as the two assets pay off in the...

A common reasoning process is to rely on an informative starting point which is somewhat incorrect and then attempt to adjust it appropriately. Evidence suggests that underlying stock volatility is such a starting point, which is scaled-up to estimate call option volatility. I adjust...

A common reasoning process is to rely on an informative starting point which is somewhat incorrect and then attempt to adjust it appropriately. Evidence suggests that underlying stock volatility is such a starting point, which is scaled-up to estimate call option volatility. I adjust...

A common reasoning process is to rely on an informative starting point which is somewhat incorrect and then attempt to adjust it appropriately. Evidence suggests that underlying stock volatility is such a starting point, which is scaled-up to estimate call option volatility. I adjust...

What happens when the anchoring and adjustment heuristic of Tversky and Kahneman (1974) is incorporated in currency option models? Surprisingly, it generates the peculiar features of currency smiles within the Black-Scholes framework, while adding power to stochastic volatility and jump...

What happens when the anchoring and adjustment heuristic of Tversky and Kahneman (1974) is incorporated in currency option models? Surprisingly, it generates the peculiar features of currency smiles within the Black-Scholes framework, while adding power to stochastic volatility and jump...

Experimental evidence and opinions of market professionals suggest that mental accounting influences option prices. I explore the implications of mental accounting of a call option with its underlying for risk management. If mental accounting influences prices and the Black Scholes approach is...

This research adapts the Black-Scholes option pricing model that is widely used in practice to a world where investors only form sufficiently rational expectations (expectations that deviate from perfection without creating arbitrage opportunities). Within the no-arbitrage interval of market...