2 p.m. - 2:50 p.m. Location: FN 2.102
Texas Tech University
Option Pricing with Greed and Fear Factor: The Rational Finance Approach
We explain main concepts of Prospect Theory and Cumulative Prospect Theory within the framework of the rational dynamic asset pricing theory. We derived option pricing formulas when the asset returns are altered with a generalized Prospect Theory value function or a modified Prelec’s probability weighting function. We study the behavioral finance notion of “greed and fear” from the point of view of the rational dynamic asset pricing theory and derived the corresponding option pricing formulas in case of asset returns following continuous diffusion or discrete binomial trees.
Coffee to be served in FN 2.102 30 minutes prior to the colloquium.
Sponsored by the Department of Mathematical Sciences