Impact of Divergent Consumer Confidence on Option Prices

James Huang ()

Review of Derivatives Research, 2003, vol. 6, issue 3, 165-177

Abstract: This paper investigates the impact of divergent consumer confidence on option prices. To model this, we assume that consumers disagree on the expected growth rate of aggregate consumption. With other conditions unchanged in the discrete-time Black–Scholes option-pricing model, we show that the representative consumer will have declining relative risk aversion instead of the assumed constant relative risk aversion. In this case all options will be underpriced by the Black–Scholes model under the assumption of bivariate lognormality. Copyright Kluwer Academic Publishers 2003

Keywords: mispricing of options; consumer confidence; heterogeneous preferences; heterogeneous beliefs; Black–Scholes model (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1023/B:REDR.0000004822.47039.bc

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