Siddiqi, Hammad (2015): Anchoring Heuristic in Option Pricing.
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Abstract
An anchoring adjusted option pricing model is put forward in which the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. Anchoring bias implies that such adjustments are insufficient. BlackScholes formula is a special case with no anchoring bias. The new model provides a unified explanation for a number of option pricing puzzles including the implied volatility skew, superior historical performance of covered call writing, and worsethanexpected performance of zero beta straddles. The model is also consistent with recent empirical findings regarding leverage adjusted option returns. Anchoring adjusted jump diffusion and stochastic volatility models are also put forward.
Item Type:  MPRA Paper 

Original Title:  Anchoring Heuristic in Option Pricing 
Language:  English 
Keywords:  Anchoring, Option Pricing, Behavioral Finance, Implied Volatility, Option Pricing Puzzles 
Subjects:  G  Financial Economics > G0  General > G02  Behavioral Finance: Underlying Principles G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  63781 
Depositing User:  Dr. Hammad Siddiqi 
Date Deposited:  23 Apr 2015 13:22 
Last Modified:  10 Oct 2019 16:20 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/63781 
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Anchoring Heuristic in Option Pricing. (deposited 26 Mar 2015 05:26)

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