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Behavioral Heterogeneity in the Option Market

  • 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.)

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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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
Date of revision:
Handle: RePEc:crf:wpaper:09-07
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