The principle of no arbitrage says that identical assets should offer the same returns. However, experimental and anecdotal evidence suggests that people often rely on analogy making while valuing assets. The principle of analogy making says that similar assets should offer the same returns. I...

An anchoring adjusted option pricing model is put forward in which the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. Anchoring bias implies that such adjustments are insufficient. Black-Scholes formula is a special case with no...

This paper analyzes empirical market utility functions and pricing kernels derived from the DAX and DAX option data for three market regimes. A consistent parametric framework of stochastic volatility is used. All empirical market utility functions show a region of risk proclivity that is...

Market professionals with decades of experience typically argue that a call option is a surrogate for the underlying asset, indicating that they perceive the risk of a call option as similar to the risk of the underlying asset. Experimental evidence also points to the same conclusion. Such...

Empirical studies on quoted options highlight deviations from the theoretical model of Black and Scholes; this is due to different causes, such as assumptions regarding the price dynamics, markets frictions and investors' attitude toward risk. In this contribution, we focus on this latter issue...

An anchoring adjusted currency option pricing formula is developed in which the risk of the underlying currency is used as a starting point which gets adjusted upwards to arrive at the currency call risk. Anchoring bias implies that such adjustments are insufficient. The new formula converges to...

Using mutual fund flow, we empirically test whether choices made by investors are consistent with preferences implied by prospect theory. Our findings support this hypothesis. When allocating capital to mutual funds, investors evaluate funds based on the past performance distribution and choose...