European Option Pricing with Constant Relative Sensitivity Probability Weighting Function
| Autor: | Paolo Pianca, Martina Nardon |
|---|---|
| Rok vydání: | 2014 |
| Předmět: |
jel:D81
Cumulative prospect theory jel:C63 media_common.quotation_subject Function (mathematics) Behavioral economics jel:G13 Measure (mathematics) Weighting Optimism Valuation of options Economics Econometrics Behavioral finance cumulative prospect theory curvature elevation European option pricing Constant (mathematics) media_common |
| Zdroj: | SSRN Electronic Journal. |
| ISSN: | 1556-5068 |
| DOI: | 10.2139/ssrn.2539085 |
| Popis: | We evaluate European financial options under continuous cumulative prospect theory. Within this framework, it is possible to model investors’ attitude toward risk, which may be one of the possible causes of mispricing. We focus on probability risk attitudes and consider alternative probability weighting functions. In particular, curvature of the weighting function models optimism and pessimism when one moves from extreme probabilities, whereas elevation can be interpreted as a measure of relative optimism. The constant relative sensitivity weighting function is the only one, amongst those in the literature, which is able to model separately curvature and elevation. We are interested in studying the effects of both these features on options prices. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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