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Investor preferences in the securities options market

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dc.contributor.authorTaylor, Philip Davisen
dc.contributor.committeechairHaller, Hansen
dc.contributor.committeememberOrr, Daniel D.en
dc.contributor.committeememberPatterson, Douglas M.en
dc.contributor.committeememberSheppard, Stephenen
dc.contributor.committeememberSmith, Williamen
dc.contributor.departmentEconomicsen
dc.date.accessioned2015-07-28T19:21:22Zen
dc.date.available2015-07-28T19:21:22Zen
dc.date.issued1989en
dc.description.abstractSystematic mispricing by the state-of-the-art option pricing models is a paradox in financial economics as both the magnitude and direction of the mispricing is debated. The models have been found to overprice out-of-the-money and deep-in-the-money call options while underpricing in-the-money and deep-out-of-the-money calls. In addition, research has shown these biases have different signs in different time periods. We propose that when investors maximize expected utility for Friedman-Savage-Markowitz utility functions, the option mispricing observed in the market will result. The theories and empirical tests in the literature of higher-order utility functions and risk-neutral valuation (RNV) in the options market are presented. Though investor attitudes towards risk are irrelevant in the non-arbitrage world of modern option pricing, to the extent the options market does not meet the non-arbitrage conditions, investor risk preferences will affect the pricing of options. Risk-loving traders will bid up market prices relative to risk-neutral model prices; risk-averse traders will bid down prices. And investor risk preferences can, and do, change over time as market conditions change. New tests are run to analyze the relationship between mispricing biases and investor preferences before and after the historic stock market crash of October 19, 1987. We find mispricing biases which imply a decreased risk aversion on the part of investors in the IBM call option markets for the period prior to the market crash and mispricing biases which imply an increased risk-averse (and decreased risk-loving) behavior in those markets following the crash. Similar analyses are also performed in the Microsoft call options markets with less conclusive results.en
dc.description.degreePh. D.en
dc.format.extentix, 200 leavesen
dc.format.mimetypeapplication/pdfen
dc.identifier.urihttp://hdl.handle.net/10919/54794en
dc.language.isoen_USen
dc.publisherVirginia Polytechnic Institute and State Universityen
dc.relation.isformatofOCLC# 20007855en
dc.rightsIn Copyrighten
dc.rights.urihttp://rightsstatements.org/vocab/InC/1.0/en
dc.subject.lccLD5655.V856 1989.T394en
dc.subject.lcshCapitalists and financiersen
dc.subject.lcshSecuritiesen
dc.subject.lcshMicroeconomicsen
dc.subject.lcshStocks -- Pricesen
dc.titleInvestor preferences in the securities options marketen
dc.typeDissertationen
dc.type.dcmitypeTexten
thesis.degree.disciplineEconomicsen
thesis.degree.grantorVirginia Polytechnic Institute and State Universityen
thesis.degree.leveldoctoralen
thesis.degree.namePh. D.en

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