We thank Robert Webb (the editor) and an anonymous referee for many valuable comments and suggestions to improve the paper. This research was supported by Basic Science Research Program and Global Ph.D. Fellowship Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education, Science and Technology (NRF-2012R1A1A2038735 and NRF-2011-0008628). All errors remain our responsibility.
Psychological Barriers and Option Pricing
Version of Record online: 26 NOV 2013
© 2013 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 35, Issue 1, pages 52–74, January 2015
How to Cite
Jang, B.-G., Kim, C., Kim, K. T., Lee, S. and Shin, D.-H. (2015), Psychological Barriers and Option Pricing. J. Fut. Mark., 35: 52–74. doi: 10.1002/fut.21648
- Issue online: 2 DEC 2014
- Version of Record online: 26 NOV 2013
- Manuscript Accepted: 3 NOV 2013
- Manuscript Received: 16 DEC 2012
- National Research Foundation of Korea (NRF)
- Ministry of Education, Science and Technology. Grant Numbers: NRF-2012R1A1A2038735, NRF-2011-0008628
Psychological barriers are prevalent among various asset classes, and it is important to consider their impact on the prices of derivative securities. This paper demonstrates the potential existence of such barriers on the S&P 500 Index and examines their impact on this index's rate of return and volatility. It focuses on deriving analytic European option prices under the assumption that the dynamics of stock prices follow a threshold model; this paper also evaluates this model's empirical performance relative to the Black–Scholes and constant elasticity of variance (CEV) models. The in-sample calibration result of the threshold model is found to be superior. Furthermore, it is found that the model provides an efficient hedging method in terms of dollar-value hedging errors. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 35:52–74, 2015