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Behavioral Heterogeneity in the Option Market

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Author Info

  • Thorsten Lehnert

    () (Luxembourg School of Finance, University of Luxembourg)

  • Bart Frijns

    () (Department of Finance, Auckland University of Technology, New Zealand)

  • Remco Zwinkels

    () (Erasmus School of Economics, Erasmus University Rotterdam.)

Abstract

This paper develops and tests a heterogeneous agents model for the option market. Our agents have different beliefs about the future level of volatility of the underlying stock index and trade accordingly. We consider two types of agents: fundamentalists and chartists, who are able to switch between groups according to a multinomial logit switching rule. The model simplifies to a GARCH-type specification with time-varying parameters. Estimation results for DAX30 index options reveal that different types of traders are actively involved in trading volatility. Our model improves frequently used standard GARCH-type models in terms of pricing performance.

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Bibliographic Info

Paper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 09-07.

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Date of creation: 2009
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Handle: RePEc:crf:wpaper:09-07

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Keywords: Heterogeneous Agents; Option Markets; Fundamentalists; Chartists; GARCH.;

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References

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Citations

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Cited by:
  1. Ellen, Saskia ter & Zwinkels, Remco C.J., 2010. "Oil price dynamics: A behavioral finance approach with heterogeneous agents," Energy Economics, Elsevier, vol. 32(6), pages 1427-1434, November.
  2. Jiri Kukacka & Jozef Barunik, 2012. "Behavioural breaks in the heterogeneous agent model: the impact of herding, overconfidence, and market sentiment," Papers 1205.3763, arXiv.org, revised May 2013.
  3. Frijns, Bart & Lehnert, Thorsten & Zwinkels, Remco C.J., 2011. "Modeling structural changes in the volatility process," Journal of Empirical Finance, Elsevier, vol. 18(3), pages 522-532, June.
  4. Cornea, A. & Hommes, C.H. & Massaro, D., 2012. "Behavioral Heterogeneity in U.S. Inflation Dynamics," CeNDEF Working Papers 12-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  5. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
  6. Adriana Cornea & Cars Hommes & Domenico Massaro, 2013. "Behavioral Heterogeneity in U.S. Inflation Dynamics," Tinbergen Institute Discussion Papers 13-015/II, Tinbergen Institute.

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