Behavioral Heterogeneity in the Option Market

28 Pages Posted: 4 Mar 2007 Last revised: 6 May 2016

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Thorsten Lehnert

University of Luxembourg

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute

Date Written: February 1, 2007


This paper develops and tests a heterogeneous agents model for the option market. Contrary to the common practice in the heterogeneous agents literature of modeling the level process, we introduce heterogeneity and switching in the variance process of the stock market. The market consists of two types of agents; fundamentalists are assumed to expect the conditional volatility to return to the unconditional volatility, while chartists respond solely on noise from the level process. Agents are able to switch between groups according to a multinomial logit switching mechanism. The model simplifies to a GARCH-type specification with time-varying parameters, which depend on the distribution of agents across types. Estimation results for index options on the German DAX30 reveal that different types of traders are also actively involved in trading volatility. Being the only unobserved variable in an option pricing model, volatility plays a pivotal role in the determination of the value of an option. Hence, we find evidence that observed option prices are the result of heterogeneity in expectations about future volatility.

Keywords: Heterogeneous Agents, Option Markets, Fundamentalists, Chartists

JEL Classification: G12

Suggested Citation

Frijns, Bart and Lehnert, Thorsten and Zwinkels, Remco C.J., Behavioral Heterogeneity in the Option Market (February 1, 2007). Journal of Economic Dynamics and Control, Vol. 34, No. 11, 2010. Available at SSRN: or

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Thorsten Lehnert

University of Luxembourg ( email )

6, rue Coudenhove-Kalergi
Luxembourg, L-1359

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
+31 20 59 85220 (Phone)


Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS

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