Index Option Returns from an Anchoring Perspective
18 Pages Posted: 22 Jun 2015 Last revised: 3 Feb 2016
Date Written: June 1, 2015
Using leverage adjusted index option data, a novel prediction of the anchoring adjusted option pricing model is tested. The anchoring model is based on the idea that the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. The anchoring heuristic implies that such adjustments are insufficient leading to underestimation of option risk. The prediction of the anchoring model is strongly supported in the data spanning nearly 26 years. Furthermore, the anchoring model is shown to be consistent with the key features observed in the data.
Keywords: Anchoring, Option Pricing, Leverage Adjusted Returns, Index Option Returns, Option Mispricing, Behavioral Finance
JEL Classification: G13, G02
Suggested Citation: Suggested Citation