Typically, three types of implied volatility smiles are seen in commodity options: the reverse skew, the smile, and the forward skew. I put forward an economic explanation for all three types of implied volatility smiles based on the idea that a commodity call option is valued in analogy with...

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...

Findings from brain sciences show that the brain must first optimize on its own internal resources before seeking to optimize on the resources available in the external world. We show that this modest change is perspective, from resource-constrained humans to resource-constrained brains,...

In this article, I incorporate the anchoring-and-adjustment heuristic into the Black-Scholes option pricing framework, and show that this is equivalent to replacing the risk-free rate with a higher interest rate. I show that the price from such a behavioralized version of the Black-Scholes model...

The empirical performance of covered call writing is quite puzzling in the traditional finance framework. Covered call writing is typically a risk reducing strategy so its expected return should be less than the expected return on the underlying in an efficient market. However, recent empirical...

We show that if sophisticated institutional managers and individual investors perceive tail-risks differently, then a new explanation for the pricing kernel puzzle emerges. We show, by example, that even a tiny difference in tail-risk perception by the two investor types can explain the pricing...