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Option Pricing when Investors are (Only) Sufficiently Rational

Siddiqi, Hammad; Murphy, Austin - 2021

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...

Persistent link: https://www.econbiz.de/10013249481

Option Momentum

Heston, Steven L.; Li, Shuaiqi - 2021

This paper improves continuous-time variance swap approximation formulas to derive exact returns on benchmark VIX option portfolios. The new methodology preserves the variance swap interpretation that decomposes returns into realized variance and option implied-variance.We apply this new...

Persistent link: https://www.econbiz.de/10013249009

Single stock call options as lottery tickets : overpricing and investor sentiment

Félix, Luiz; Kräussl, Roman; Stork, Philip - 2018

This paper investigates whether the overpricing of out-of-the money single stock calls can be explained by Tversky and Kahneman's (1992) cumulative prospect theory (CPT). We hypothesize that these options are expensive because investors overweight small probability events and overpay for...

Persistent link: https://www.econbiz.de/10011911548

Option Momentum

Heston, Steven L.; Jones, Christopher S.; Khorram, Mehdi; … - 2022

This paper investigates the performance of option investments across different stocks by computing monthly returns on at-the-money straddles on individual equities. It finds that options with high historical returns continue to significantly outperform options with low historical returns over...

Persistent link: https://www.econbiz.de/10013406104

Derivatives Traders’ Reaction to Mispricing in the Underlying Equity

Hayunga, Darren K. - 2012

This article examines trading behavior in the options market conditioned on mispricing in the underlying stock. We investigate the price equilibrium between the observed equity asset and the options-implied synthetic share as well as the relative divergence between the two prices. We find a...

Persistent link: https://www.econbiz.de/10013116041

The Role of Financial Investors in Determining the Commodity Futures Risk Premium

Isleimeyyeh, Mohammad - 2020

I develop and test a model to study the interaction between the commodity and stock markets. This study attempts to clarify the debate about the effect of financialization on commodity markets. Theoretically, the futures risk premium is determined by hedging pressure, stock market returns, and...

Persistent link: https://www.econbiz.de/10012851801

Winners, Losers, and Regulators in a Derivatives Market Bubble

Li, Xindan - 2020

We use proprietary brokerage data to study trading patterns within a well-known financial market bubble: that in the Chinese warrants market. Persistently successful investors traded very actively and exhibited characteristics of de facto market makers. Unskilled investors unprofitably...

Persistent link: https://www.econbiz.de/10012852960

Limits of Arbitrage and Primary Risk Taking in Derivative Securities

Tian, Meng; Wu, Liuren - 2021

Classic option pricing theory values a derivative contract via dynamic replication, and views the derivative as … reducing the risk in derivative investments, the remaining risk can still be large and significant due to practical limits of … arbitrage. Because of these limits, derivative securities can play primary roles in risk allocation and investors can demand …

Persistent link: https://www.econbiz.de/10013244989

Sentimental recovery

Pazarbasi, Altan; Schneider, Paul; Vilkov, Grigory - 2019 - This version: November 29, 2019

We investigate the market-compatible degree of agent heterogeneity by identifying and analyzing the full range of conditional beliefs consistent with observed asset prices and good-deal bounds. Our methodology neither makes assumptions on underlying processes nor does it use survey data. It can...

Persistent link: https://www.econbiz.de/10012134438

An overreaction implementation of the coherent market hypothesis and option pricing

Schöbel, Rainer (contributor); Veith, Jochen (contributor) - 2006

our dynamic stock price model, we develop a two factor general equilibrium model for pricing derivative securities. The …

Persistent link: https://www.econbiz.de/10003636657

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