Index Option Returns from an Anchoring Perspective

Siddiqi Hammad

MPRA Paper from University Library of Munich, Germany

Abstract: Using leverage adjusted index option data, a novel prediction of the anchoring adjusted option pricing model is tested. The anchoring model is based on the idea that the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. The anchoring heuristic implies that such adjustments are insufficient leading to underestimation of option risk. The prediction of the anchoring model is strongly supported in the data spanning nearly 26 years. Furthermore, the anchoring model is shown to be consistent with the key features observed in the data.

Keywords: Anchoring; Option Pricing; Leverage Adjusted Returns; Option Mispricing; Behavioral Finance (search for similar items in EconPapers)
JEL-codes: G02 G13 (search for similar items in EconPapers)
Date: 2015-06-01
New Economics Papers: this item is included in nep-cfn
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