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Psychological Barriers and Option Pricing
Author(s) -
Jang BongGyu,
Kim Changki,
Kim Kyeong Tae,
Lee Seungkyu,
Shin DongHoon
Publication year - 2015
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.21648
Subject(s) - economics , econometrics , derivative (finance) , black–scholes model , liberian dollar , implied volatility , valuation of options , constant elasticity of variance model , index (typography) , volatility (finance) , volatility smile , stock market index , financial economics , computer science , volatility swap , stock market , world wide web , finance , paleontology , horse , biology
Psychological barriers are prevalent among various asset classes, and it is important to consider their impact on the prices of derivative securities. This paper demonstrates the potential existence of such barriers on the S&P 500 Index and examines their impact on this index's rate of return and volatility. It focuses on deriving analytic European option prices under the assumption that the dynamics of stock prices follow a threshold model; this paper also evaluates this model's empirical performance relative to the Black–Scholes and constant elasticity of variance (CEV) models. The in‐sample calibration result of the threshold model is found to be superior. Furthermore, it is found that the model provides an efficient hedging method in terms of dollar‐value hedging errors. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 35:52–74, 2015