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Multinomial Option Pricing Model Based on Behavioral Finance

Author: ZuoZengLi
Tutor: LiuXiaoMao
School: Huazhong University of Science and Technology
Course: Probability Theory and Mathematical Statistics
Keywords: multinomial option pricing behavioral finance prospect theory mental accounting warrants market
CLC: F830.9
Type: Master's thesis
Year: 2011
Downloads: 125
Quote: 0
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Abstract


Traditional finance option pricing models are all based on EMH and investors are rational, but the actual option market is not always effective and most investors are irrational. In order to be more in line with the real psychology of investors, this paper makes use of mental accounting theory and prospect theory of behavioral finance to modify the traditional multinomial option pricing model.This paper learns from conclusions of German scholar Bettina Rockenbach. Generally, investors put stocks and options in the same mental accounting and expected the same rate of return. Based on those conclusions, this paper modifies the risk-neutral pricing of traditional multinomial option pricing model. In the process of model construction, this paper first introduces the construction process of traditional multinomial option pricing model, and then constructs new pricing models. In addition, this paper describes the pricing model of binomial and trinomial in detail.To test the explanatory power of the modified pricing model, this paper compares the practical effect of modified binomial pricing model with traditional model by means of actual warrants market data. Finally, the modified option pricing model has a stronger explanatory power than traditional pricing model.It is no doubt that behavioral finance is the revolution of traditional finance, but many outcomes of behavioral finance are built on the basis of specific experiments, so the research methods and the scopes have some limitations, this paper also has encountered the corresponding problem, which is the aspect of this paper.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Financial market
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