Behavioral heterogeneity in the option market

Bart Frijns (1) , Thorsten Lehnert (2) , Remco C.J. Zwinkels (3)

1 Department of Finance
2 University of Luxembourg [Luxembourg]
3 Erasmus University Rotterdam

This paper develops and tests a heterogeneous agents model for the option market. Our agents have different beliefs about the future level of volatility of the underlying stock index and trade accordingly. We consider two types of agents: fundamentalists and chartists, who are able to switch between groups according to a multinomial logit switching rule. The model simplifies to a GARCH-type specification with time-varying parameters. Estimation results for DAX30 index options reveal that different types of traders are actively involved in trading volatility. Our model improves frequently used standard GARCH-type models in terms of pricing performance.

Mots clés: Heterogeneous Agents; Option Markets; Fundamentalists; Chartists; GARCH; G12; C15

Domaines: Économie et finance quantitative [q-fin]

Bart Frijns, Thorsten Lehnert, Remco C.J. Zwinkels. Behavioral heterogeneity in the option market. Journal of Economic Dynamics and Control, 2010, 34 (11), pp.2273. ⟨10.1016/j.jedc.2010.05.009⟩. ⟨hal-00736742⟩