Behavioral heterogeneity in the option market

Bart Frijns, Thorsten Lehnert and Remco Zwinkels ()

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Abstract: This paper develops and tests a heterogeneous agents model for the option market. Our agents have different beliefs about the future level of volatility of the underlying stock index and trade accordingly. We consider two types of agents: fundamentalists and chartists, who are able to switch between groups according to a multinomial logit switching rule. The model simplifies to a GARCH-type specification with time-varying parameters. Estimation results for DAX30 index options reveal that different types of traders are actively involved in trading volatility. Our model improves frequently used standard GARCH-type models in terms of pricing performance.

Keywords: Heterogeneous Agents; Option Markets; Fundamentalists; Chartists; GARCH; G12; C15 (search for similar items in EconPapers)
Date: 2010-09-29
Note: View the original document on HAL open archive server: https://hal.science/hal-00736742v1
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Citations: View citations in EconPapers (61)

Published in Journal of Economic Dynamics and Control, 2010, 34 (11), pp.2273. ⟨10.1016/j.jedc.2010.05.009⟩

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Journal Article: Behavioral heterogeneity in the option market (2010)
Working Paper: Behavioral Heterogeneity in the Option Market (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00736742

DOI: 10.1016/j.jedc.2010.05.009

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