Siddiqi, Hammad (2015): Anchoring Heuristic in Option Pricing.
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Abstract
Based on experimental and anecdotal evidence, an anchoringadjusted 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 riskaverse 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.
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:  68611 
Depositing User:  Dr. Hammad Siddiqi 
Date Deposited:  31 Dec 2015 05:55 
Last Modified:  30 Sep 2019 11:27 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/68611 
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Anchoring Heuristic in Option Pricing. (deposited 26 Mar 2015 05:26)

Anchoring Heuristic in Option Pricing. (deposited 04 Apr 2015 05:54)

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