Assuming investors are loss averse, repeated risky investments are less attractive inmyopic evaluation. A theoretical foundation for this effect is given by the behavioralconcept of myopic loss aversion (MLA). The consequences of MLA have been confirmedin several between-subject experimental...

We suggest a simple asset market model in which we analyze competitive and strategic behavior simultaneously. If two-fund separation is found to hold across periods for competitive behavior, it also holds for strategic behavior. In this case the relative prices of the assets do not depend on...

We study how the framework of classical game theory changes when the preferences of the players are described by Prospect Theory instead of Expected Utility Theory. Specifically, we study the influence of framing effect and probability weighting on the existence and specific structure of Nash...

We introduce a new analytical approach to price American options. Using an explicit and intuitive proxy for the exercise rule, we derive tractable pricing formulas using a short-maturity asymptotic expansion. Depending on model parameters, this method can accurately price options with...

In this paper we construct arbitrage-free market models of stochastic volatility type for one stock, one bank account and a finite family of European call options with various strikes and maturities. We first introduce local implied volatilities and price level as market observables which...

In empirical modeling, there have been two strands for pricing in the options literature, namely the parametric and nonparametric models. Often, the support for the nonparametric methods is based on a benchmark such as theBlack-Scholes model with constant volatility. In this paper, we examine...

This paper investigates the impact of heterogeneous beliefs of professional investors on the currency options market. Using a unique data set with detailed information on the foreign-exchange forecasts of about 50 market participants over more than ten years, we construct an empirical proxy for...

In the existing literature on barrier options, much effort has been exerted to ensureconvergence through placing the barrier in close proximity to, or directly onto, thenodes of the tree lattice. In this paper we show that this may not be necessary toachieve accurate option price...

Financial models are largely used in option pricing. These physical models capture several salient features of asset price dynamics. The pricing performance can be significantly enhanced when they are combined with nonparametric learning approaches, that empirically learn and correct pricing...

Do you enjoy chores such as mowing the lawn or, as it is called in Canada, shovelling the snow? Below we discuss a simpler method of trimming the hedge, suggested by Barone-Adesi, Engle and Mancini. Assuming the option price is homogeneous our calculation is model independent and provides delta...