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A note on rational call option exercise
Author(s) -
Engström Malin
Publication year - 2002
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10020
Subject(s) - rationality , equity (law) , transaction cost , economics , affect (linguistics) , put option , database transaction , actuarial science , psychology , financial economics , microeconomics , computer science , political science , law , database , communication
Using Swedish equity option data, the rationality in the exercise of American call options is analyzed to seehow well it complies with the theoretical exercise rules. Although the exercise behavior appears to be rationaloverall, several cases of both faulty exercise and failure to exercise are found. Almost a third of the earlyexercised calls are exercised at other times than predicted by theory. Several of these exercise decisions couldpotentially be explained by transaction costs, indicating that market frictions do affect the exercise behavior.However, over two thirds of the faulty exercises cannot be explained at all. © 2002 Wiley Periodicals, Inc.Jrl Fut Mark 22:471–482, 2002