Siddiqi, Hammad (2013): Mental Accounting: A ClosedForm Alternative to the Black Scholes Model.
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Abstract
Experimental evidence and opinions of market professionals suggest that people rely on mental accounting while valuing a call option. I show that mental accounting generates a closedform alternative to the Black Scholes formula that does not require a complete market. The new formula is arbitrage free. The new formula differs from the Black Scholes formula only due to the appearance of a parameter in the formula that captures the risk premium on the underlying. The new formula, called the analogy option pricing formula, provides a new explanation for the implied volatility skew puzzle. I also show that the key aspects of the analogy formula are consistent with empirical evidence.
Item Type:  MPRA Paper 

Original Title:  Mental Accounting: A ClosedForm Alternative to the Black Scholes Model 
English Title:  Mental Accounting: A ClosedForm Alternative to the Black Scholes Model 
Language:  English 
Keywords:  Mental Accounting, Analogy Making, Option Pricing, Behavioral Finance, Implied Volatility Skew, Black Scholes 
Subjects:  G  Financial Economics > G0  General G  Financial Economics > G0  General > G02  Behavioral Finance: Underlying Principles G  Financial Economics > G1  General Financial Markets 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:  54269 
Depositing User:  Hammad Siddiqi 
Date Deposited:  10 Mar 2014 00:21 
Last Modified:  26 Sep 2019 20:05 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/54269 
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Mental Accounting: A ClosedForm Alternative to the Black Scholes Model. (deposited 20 Oct 2013 13:17)
 Mental Accounting: A ClosedForm Alternative to the Black Scholes Model. (deposited 10 Mar 2014 00:21) [Currently Displayed]