Barbara Alemanni

On the Role of Behavioral Finance in the Pricing of Financial Derivatives: The Case of the S&P 500

The object of this study was to investigate some implications of the tenets of behavioral finance on the pricing of financial derivatives. In particular, based on the work by Wolff, et al (2009) we have investigated how prospect theory (Kahneman and Tversky, 1979) can be intregrated into the Black and Scholes (1973) option pricing framework. We have then used the resulting “behavioral version” of the Black-Scholes equation to price market quoted options. As an empirical test we have calibrated three-month market-quoted call options on the Standard & Poor’s 500 index (SPX) at the Chicago Board of Options Exchange (CBOE) during the period January to December 2007. As a comparison, we have also calibrated the Heston (1993) stochastic volatility option pricing model to the same contracts. Our results show that during the period of study the market option prices are captured better by the behavioral version of the Black-Scholes equation than by the Heston stochastic volatility model. Further work is required to investigate if this is the case for other option types and under different market conditions.

Individual behaviour and long-range planning attitude

Declining welfare systems increase the importance of self-determination in pension decisions. Thus, the stability of long-life consumption markedly relies on individual long-range planning attitude. Our paper investigates how behavioural traits affect this attitude and influence the probability of holding voluntary integrative pension schemes (VIPS). We find that psychophysiological heterogeneity plays a role in predicting demand for VIPS, together with saving/indebtedness style and conventional sociodemographic characteristics. Specifically, individuals who have a high degree of non-planning impulsiveness, and who are inclined to intense psychophysiological arousals, are less likely to demand VIPS. Our results imply that behavioural individualities might prompt individuals to postpone, or even neglect, decisions necessary to maintain stable lifestyles in the long range.