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Investor behavior in the currency option market during the COVID-19 pandemic

Author

Listed:
  • Wael Dammak

    (LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Nahla Boutouria
  • Salah Ben Hamad

    (Université de Sfax - University of Sfax)

  • Christian de Peretti

    (ECL - École Centrale de Lyon - Université de Lyon, LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

Abstract

This study investigates the COVID-19 pandemic's impact on investor behavior in the currency options market, emphasizing its relationship with underlying exchange rates. Using a sample of daily data from select futures continuous calls from September 22, 2016, to December 31, 2021, we introduce a novel variable, "market imperfections," to quantify the gap between observed and theoretical currency option prices based on the Garman and Kohlhagen model. Through the application of a Markov switching model, we identify pandemic-related changes in investor behavior, characterized by patterns of divergence and convergence. Our research distinguishes between two key behavioral types in the market: fundamentalists and chartists. This study enriches the literature by clarifying how crises, specifically the COVID-19 period, influence investor dynamics and affect market responses. Overall, we provide critical insights into the factors shaping behavior during challenging periods.

Suggested Citation

  • Wael Dammak & Nahla Boutouria & Salah Ben Hamad & Christian de Peretti, 2023. "Investor behavior in the currency option market during the COVID-19 pandemic," Post-Print hal-04875460, HAL.
    • Handle: RePEc:hal:journl:hal-04875460
    DOI: 10.1016/j.jeca.2023.e00337
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