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Behavioral heterogeneity in the option market

Author

Listed:
  • Bart Frijns

    (Department of Finance - AUT - Auckland University of Technology)

  • Thorsten Lehnert

    (University of Luxembourg [Luxembourg])

  • Remco C.J. Zwinkels

    (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

  • Bart Frijns & Thorsten Lehnert & Remco C.J. Zwinkels, 2010. "Behavioral heterogeneity in the option market," Post-Print hal-00736742, HAL.
    • Handle: RePEc:hal:journl:hal-00736742
    DOI: 10.1016/j.jedc.2010.05.009
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    More about this item

    Keywords

    Heterogeneous Agents; Option Markets; Fundamentalists; Chartists; GARCH; G12; C15;
    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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