Assessing Effect of Market Sentiment on Pricing of European Currency Options ‎

Wael Dammak
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Wael Dammak: University of Lyon, University Claude Bernard Lyon 1, Institute of Financial and Insurance Sciences, LSAF-EA2429, F-69007, Lyon, France Faculty of Economics and Management of Sfax, LREG-LR18ES27, Sfax, Tunisia

International Journal of Research and Innovation in Social Science, 2024, vol. 8, issue 6, 1224-1244

Abstract: The discrepancy between theoretical predictions and actual prices in currency options markets poses a significant challenge in financial economics. Despite extensive research, traditional models, including the Garman and Kohlhagen (1983) model, overlook critical factors such as investor sentiment, assuming complete market efficiency. Addressing this gap, this study integrates investor behavior into the currency option pricing model. Utilizing daily data from five pairs of currency call options spanning from January 1, 2018, to November 24, 2022, the study investigates the impact of this integration on the accuracy of currency call price predictions. Results reveal a marked enhancement in prediction accuracy, as evidenced by a reduced root mean squared error. The incorporation of market sentiment proves to be crucial, enhancing the Garman and Kohlhagen model’s precision and offering a more reliable approach for estimating currency call prices. The findings underscore the significant role of investor behavior in asset pricing, emphasizing the need for its consideration in future models and theories.

Date: 2024
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