Munich Personal RePEc Archive

Anchoring Heuristic in Option Pricing

Siddiqi, Hammad (2015): Anchoring Heuristic in Option Pricing.

This is the latest version of this item.

[img]
Preview
PDF
MPRA_paper_68611.pdf

Download (919kB) | Preview

Abstract

Based on experimental and anecdotal evidence, an anchoring-adjusted option pricing model is developed in which the volatility of the underlying stock return is used as a starting point that gets adjusted upwards to form expectations about call option volatility. I show that the anchoring price lies within the bounds implied by risk-averse expected utility maximization when there are proportional transaction costs. The anchoring model provides a unified explanation for key option pricing puzzles. Two predictions of the anchoring model are empirically tested and found to be strongly supported with nearly 26 years of options data.

Available Versions of this Item

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.