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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.)

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    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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    Related research

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

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    References

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    Cited by:
    1. 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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