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A note on rational call option exercise

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  • Malin Engström

Abstract

Using Swedish equity option data, the rationality in the exercise of American call options is analyzed to see how well it complies with the theoretical exercise rules. Although the exercise behavior appears to be rational overall, several cases of both faulty exercise and failure to exercise are found. Almost a third of the early exercised calls are exercised at other times than predicted by theory. Several of these exercise decisions could potentially be explained by transaction costs, indicating that market frictions do affect the exercise behavior. However, over two thirds of the faulty exercises cannot be explained at all. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:471–482, 2002

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  • Malin Engström, 2002. "A note on rational call option exercise," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(5), pages 471-482, May.
    • Handle: RePEc:wly:jfutmk:v:22:y:2002:i:5:p:471-482
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    1. Chockalingam, Arun & Feng, Haolin, 2015. "The implication of missing the optimal-exercise time of an American option," European Journal of Operational Research, Elsevier, vol. 243(3), pages 883-896.

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