Heterogeneous trading of option implied volatility

Xiaoping Li, Chunyang Zhou and Wei Huang

Applied Economics, 2023, vol. 55, issue 9, 990-998

Abstract: We investigate the equilibrium properties of the implied volatility in the option market within the framework of a dynamic heterogeneous agent model. Fundamentalists and chartists are incorporated into our heterogeneous agent model, and they can change their types based on their previous performance. We show that the stability conditions of the model mainly depend on the relationship between the mean-reverted coefficients of fundamentalists and the extrapolation coefficients of chartists. The empirical results show that the fundamentalists and chartists of volatility coexist in the option market. However, during the market panic, especially before and after the 2008 financial crisis, chartists dominate the market.

Date: 2023
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DOI: 10.1080/00036846.2022.2095343

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