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Index Option Returns from an Anchoring Perspective

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  • Hammad, Siddiqi

Abstract

Using leverage adjusted index option data, a novel prediction of the anchoring adjusted option pricing model is tested. The anchoring model is based on the idea that the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. The anchoring heuristic implies that such adjustments are insufficient leading to underestimation of option risk. The prediction of the anchoring model is strongly supported in the data spanning nearly 26 years. Furthermore, the anchoring model is shown to be consistent with the key features observed in the data.

Suggested Citation

  • Hammad, Siddiqi, 2015. "Index Option Returns from an Anchoring Perspective," MPRA Paper 65331, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:65331
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    References listed on IDEAS

    as
    1. Cen, Ling & Hilary, Gilles & Wei, K. C. John, 2013. "The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(1), pages 47-76, February.
    2. Siddiqi, Hammad, 2015. "Anchoring Heuristic in Option Pricing," Risk and Sustainable Management Group Working Papers 207677, University of Queensland, School of Economics.
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    12. Siddiqi, Hammad, 2015. "Anchoring Heuristic in Option Pricing," MPRA Paper 63218, University Library of Munich, Germany.
    13. Siddiqi, Hammad, 2009. "Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment," MPRA Paper 13515, University Library of Munich, Germany.
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    More about this item

    Keywords

    Anchoring; Option Pricing; Leverage Adjusted Returns; Option Mispricing; Behavioral Finance;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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