Market turbulence and investor decision-making in currency option market

Wael Dammak, Wajdi Frikha and Mohamed Naceur Souissi

The Journal of Economic Asymmetries, 2024, vol. 30, issue C

Abstract: This research delves into the effects of recent crises on investor behavior within the currency options market, particularly focusing on the relationship with underlying exchange rates. Analyzing daily EUR/USD currency call pair data from May 4, 2011, to June 19, 2023, we employ a genetic algorithm to calculate stochastic volatility in line with the Garman and Kohlhagen model. Through the application of the STAR model, we identified shifts in investor behavior across various crisis periods. These shifts are linked to inherent asymmetries in the time series data, illustrating the diverse strategies of different investor types, such as fundamentalists and chartists. Our findings reveal how each investor group tailors its approach to these market asymmetries, showcasing distinct strategies and responses to fluctuating market conditions and crises. This study contributes to the financial literature by offering a more nuanced understanding of how crises influence investor behavior and the dynamics of currency markets. Ultimately, it sheds light on the complexities of investor behavior during economic challenges.

Keywords: Investor behavior; Market turbulence; Currency option market; STAR model; Genetic algorithm; Fundamentalists & chartists (search for similar items in EconPapers)
JEL-codes: F31 F37 G01 G41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:30:y:2024:i:c:s1703494924000227

DOI: 10.1016/j.jeca.2024.e00373

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