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Behavioral Heterogeneity in the Option Market

Author

Listed:
  • 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.

Suggested Citation

  • Thorsten Lehnert & Bart Frijns & Remco Zwinkels, 2009. "Behavioral Heterogeneity in the Option Market," LSF Research Working Paper Series 09-07, Luxembourg School of Finance, University of Luxembourg.
    • Handle: RePEc:crf:wpaper:09-07
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    References listed on IDEAS

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    More about this item

    Keywords

    Heterogeneous Agents; Option Markets; Fundamentalists; Chartists; GARCH.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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