Siddiqi, Hammad (2010): Coarse thinking, implied volatility, and the valuation of call and put options.

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Abstract
People think by analogies and comparisons. Such way of thinking, termed coarse thinking by Mullainathan et al [Quarterly Journal of Economics, May 2008] is intuitively very appealing. We derive a new option pricing formula based on the assumption that the market consists of coarse thinkers as well as rational investors. The new formula, called the behavioral option pricing formula is a generalization of the BlackScholes formula. The new formula not only provides explanations for the implied volatility skew and term structure puzzles in equity index options but is also consistent with the observed negative relationship between contemporaneous equity price shocks and implied volatility.
Item Type:  MPRA Paper 

Original Title:  Coarse thinking, implied volatility, and the valuation of call and put options 
Language:  English 
Keywords:  Coarse Thinking; Option Pricing; Implied Volatility; Implied Volatility Skew; Implied Volatility Smile; Implied Volatility Term Structure 
Subjects:  G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  23261 
Depositing User:  Hammad Siddiqi 
Date Deposited:  12. Jun 2010 15:06 
Last Modified:  14. Mar 2015 18:01 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/23261 