Dissecting the investor space

Nikhil Jaisinghani

Journal of Economic Studies, 2026, vol. 53, issue 7, 1309-1325

Abstract: PurposeThis paper proposes an options pricing model capable of constructing subspaces within which lie investors compelled to take long positions, take short positions or neither. From these subspaces, the median investor’s expected future price of a security and the uncertainty of that future price can be estimated. Further, the model aims to be more compliant with real world market characteristics than prevailing options pricing models.Design/methodology/approachI outline three relevant complex elements of securities markets. First, the market is not homogeneous; each investor has their unique forecasts and levels of conviction. Second, investors are not risk neutral and have non-linear utility functions; the paper adapts an established utility function from behavioral finance. Third, most market participants find an asset’s price too high to buy and too low to short, instead opting to take neither long nor short positions.FindingsThe model uses options prices and the above three observations to dissect the investor space and estimate the median investor’s expected future price of the underlying asset. The paper concludes that this model is able to extract more information, including the expected future price of the underlying, from options prices than current models and is more consistent with real-world market characteristics.Practical implicationsThe model has a number of immediate practical applications: The model also allows for individual investors to derive a reasonable fair price for an option based on the investor’s specific expected return and degree of uncertainty of this return, acknowledging that both factors are important in options pricing. The proposed model may offer an improved means of deriving market expected returns over the capital asset pricing model. The model offers an improved method for calculating the implied volatility of a security which is not reliant on the views only of the minority of the market which invests in options. Measurements of implied volatility that reflect the sentiment of the most optimistic or pessimistic portion of the market are subject to selection bias. Finally, investors may find that calculations of the market’s expected returns of an asset using options pricing better identify contrarian views upon which the investor can act.Originality/valueThis options pricing model is unique in that it is built upon real world market characteristics such as investor heterogeneity, risk-aversion and limited participation. The result is a model developed to extract characteristics of the entire market despite most of the market not participating in the pricing of the underlying asset and its options.

Keywords: Options pricing; Asset pricing; Black-scholes; Market implied expected return; Options implied expected return (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/jes/article/53/7/1309/1357 ... g-the-investor-space (text/html)
https://www.emerald.com/jes/article-pdf/53/7/1309/ ... s-04-2025-0282en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-04-2025-0282

DOI: 10.1108/JES-04-2025-0282

Access Statistics for this article

Journal of Economic Studies is currently edited by Prof Mohsen Bahmani-Oskooee

More articles in Journal of Economic Studies from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().