Behavioral Heterogeneity in the Option Market

B. Frijns; T. Lehnert; R.C.J. Zwinkels

doi:10.1016/j.jedc.2010.05.009

Behavioral Heterogeneity in the Option Market

B. Frijns, T. Lehnert, R.C.J. Zwinkels

Finance

Research output: Contribution to Journal › Article › Academic › peer-review

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. © 2010 Elsevier B.V.

Original language	English
Pages (from-to)	2273-2287
Journal	Journal of Economic Dynamics and Control
Volume	34
Issue number	11
DOIs	https://doi.org/10.1016/j.jedc.2010.05.009
Publication status	Published - 2010

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Cite this

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AB - 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. © 2010 Elsevier B.V.

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