Behavioral heterogeneity in the option market

B Frijns; T Lehnert; RCJ Zwinkels

doi:10.1016/j.jedc.2010.05.009

Behavioral heterogeneity in the option market

B Frijns, T Lehnert, RCJ Zwinkels

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.

Original language	English
Pages (from-to)	2273-2287
Number of pages	15
Journal	Journal of Economic Dynamics & Control
Volume	34
Issue number	11
DOIs	https://doi.org/10.1016/j.jedc.2010.05.009
Publication status	Published - Nov 2010
Externally published	Yes

Keywords

Chartists
Fundamentalists
GARCH
Heterogeneous agents
Option markets

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10.1016/j.jedc.2010.05.009

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title = "Behavioral heterogeneity in the option market",

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.",

keywords = "Chartists, Fundamentalists, GARCH, Heterogeneous agents, Option markets",

author = "B Frijns and T Lehnert and RCJ Zwinkels",

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AU - Frijns, B

AU - Lehnert, T

AU - Zwinkels, RCJ

PY - 2010/11

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N2 - 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.

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.

KW - Chartists

KW - Fundamentalists

KW - GARCH

KW - Heterogeneous agents

KW - Option markets

U2 - 10.1016/j.jedc.2010.05.009

DO - 10.1016/j.jedc.2010.05.009

M3 - Article

SN - 0165-1889

VL - 34

SP - 2273

EP - 2287

JO - Journal of Economic Dynamics & Control

JF - Journal of Economic Dynamics & Control

IS - 11

ER -

Behavioral heterogeneity in the option market

Abstract

Keywords

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