Corpus ID: 218595926

Rational Finance Approach to Behavioral Option Pricing.

@article{Dai2020RationalFA,
  title={Rational Finance Approach to Behavioral Option Pricing.},
  author={Jiexin Dai and Abootaleb Shirvani and Frank J. Fabozzi},
  journal={arXiv: Computational Finance},
  year={2020}
}
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

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