Corpus ID: 218595926

Rational Finance Approach to Behavioral Option Pricing.

  title={Rational Finance Approach to Behavioral Option Pricing.},
  author={Jiexin Dai and Abootaleb Shirvani and Frank J. Fabozzi},
  journal={arXiv: Computational Finance},
When pricing options, there may be different views on the instantaneous mean return of the underlying price process. According to Black (1972), where there exist heterogeneous views on the instantaneous mean return, this will result in arbitrage opportunities. Behavioral finance proponents argue that such heterogenous views are likely to occur and this will not impact option pricing models proposed by rational dynamic asset pricing theory and will not give rise to volatility smiles. To rectify… Expand

Figures from this paper


On the Role of Behavioral Finance in the Pricing of Financial Derivatives: The Case of the S&P 500
The object of this study was to investigate some implications of the tenets of behavioral finance on the pricing of financial derivatives. In particular, based on the work by Wolff, et al (2009) weExpand
A Behavioral Approach to Asset Pricing
Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is increasingly becoming the common way of understanding investor behavior and stockExpand
The behavioral relevance of mental accounting for the pricing of financial options
Abstract The paper reports an experiment on the pricing of financial options. Arbitrage-free option pricing is tested against three hypotheses based on mental accounting. The data show that, evenExpand
A Survey of Behavioral Finance
Behavioral finance argues that some financial phenomena can plausibly be understood using models in which some agents are not fully rational. The field has two building blocks: limits to arbitrage,Expand
Dynamic Asset Pricing Theory
"Dynamic Asset Pricing Theory" is a textbook for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricingExpand
Rational Markets: Yes or No? The Affirmative Case
This paper presents the logic behind the increasingly neglected proposition that prices set in developed financial markets are determined as if all investors are rational. It contends thatExpand
Arbitrage, hedging and utility maximization using semi-static trading strategies with American options
We consider a financial market where stocks are available for dynamic trading, and European and American options are available for static trading (semi-static trading strategies). We assume that theExpand
Prospect Theory and Stock Market Anomalies
We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 23 prominent stock market anomalies. The model incorporates allExpand
Investor Psychology and Asset Pricing
The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, securityExpand
Modern Portfolio Theory and Behavioral Finance
The author starts with a brief history of the ‘discoveries’ of modern portfolio theory and behavioral finance and suggests that the latter may well create just as much of a revolution in the wealthExpand