Siddiqi, Hammad (2009): Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment.
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Mullainathan et al [Quarterly Journal of Economics, May 2008] present a model of coarse thinking or analogy based thinking. The essential idea behind coarse thinking is that people put situations into categories and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in other co-categorized situations. We test this hypothesis in an experiment on financial options against the benchmark of arbitrage-free pricing. Firstly, we test whether a financial option is priced in analogy with its underlying stock (transference). Secondly, we test for whether variations in the analogy between a financial option and its underlying stock matter (framing). We find evidence in support of both transference and framing.
|Item Type:||MPRA Paper|
|Original Title:||Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment|
|Keywords:||Coarse Thinking, Financial Options, Arbitrage-Free Pricing|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Hammad Siddiqi|
|Date Deposited:||20. Feb 2009 13:42|
|Last Modified:||14. Feb 2013 09:38|
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