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Impact on option prices of divergent consumer confidence

Huang, J (2002) Impact on option prices of divergent consumer confidence. Working Paper. The Department of Accounting and Finance, Lancaster University.

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    This paper investigates the impact on option prices of divergent consumer confidence. To model this, we assume that consumers disagree on the expected growth rate of aggregate consumption. With other conditions unchanged in the discrete-time Black-Scholes option-pricing model, we show that the representative consumer will have declining relative risk aversion instead of the assumed constant relative risk aversion. In this case all options will be underpriced by the Black-Scholes model under the assumption of bivariate lognormality. We also extend Benninga and Mayshars (2000) results about impact on option prices of heterogeneous beliefs and preferences to an N-agent economy.

    Item Type: Monograph (Working Paper)
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 48622
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:02
    Refereed?: No
    Published?: Published
    Last Modified: 30 Dec 2017 00:06
    Identification Number:

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