Behavioralizing the Black-Scholes Model

Hammad Siddiqi

MPRA Paper from University Library of Munich, Germany

Abstract: In this article, I incorporate the anchoring-and-adjustment heuristic into the Black-Scholes option pricing framework, and show that this is equivalent to replacing the risk-free rate with a higher interest rate. I show that the price from such a behavioralized version of the Black-Scholes model generally lies within the no-arbitrage bounds when there are transaction costs. The behavioralized version explains several phenomena (implied volatility skew, countercyclical skew, skew steepening at shorter maturities, inferior zero-beta straddle return, and superior covered-call returns) which are anomalies in the traditional Black-Scholes framework. Six testable predictions of the behavioralized model are also put forward.

Keywords: Black-Scholes Model; Anchoring-and-Adjustment; Implied Volatility; Covered-Call; Zero-Beta Straddle; Leverage-Adjusted Returns (search for similar items in EconPapers)
JEL-codes: G00 G02 G20 G22 (search for similar items in EconPapers)
Date: 2015-03-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/86234/1/MPRA_paper_86234.pdf original version (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:pra:mprapa:86234

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().